In this week’s Blog post, we continue our criticism of the U.S. Tax Code. Remember the old saying about not wanting to watch sausages or laws being made? The Code itself represents the worst and most contentious lawmaking by elected officials with diametrically opposite opinions. From the original Code, which contained a total of 27 pages, the size and complexity of the current Code has grown to tens of thousands of pages, understood by very few.
Due to large tax demands on our earnings, an entire industry has grown for the dual purposes of Code compliance and tax minimization. Most Americans utilize accountants, attorneys, and/or investment managers annually. The Code is simply too complex for all but the most qualified practitioners.
Conceptually, our American tax system should be fair to all who fall under its mandates. I have no misconceptions about that remote possibility, but our lawmakers should continually strive to achieve that status. Any lawmakers who adopt the fairness challenge will face a long road ahead.
In recent Blogs, we have discussed the Marriage Penalty, as well as some Inflation-indexing already built into the Code. Both fall short of achieving Code fairness. This week, we look at Code provisions that claim to be inflation-indexed but, in reality, represent an injustice commonly found in rules for Retirement Accounts (a topic near and dear to Van Wie Financial).
Stepped indexing applies to items such as IRA (Individual Retirement Account) contribution limits, which do rise, but only when the CPI rises enough over time to exceed a predetermined increase, such as $500 or $1,000. The same is true for so-called “catch-up contributions,” which are additional limits for people ages 50 and up. In times of moderate inflation, several years may go by without allowing our contribution limits to grow, creating another de facto tax increase in the non-adjustment years.
Since changes are applied to the Tax Code annually, it would be no more burdensome for taxpayers to up their annual contributions by smaller amounts, matched to actual (government-calculated) inflation. Over time, the extra dollars invested over the years would compound to enhance retirement incomes for Americans. After all, that’s why we take on personal responsibility for our own financial futures.
Contributions to company-sponsored Retirement Accounts work essentially the same way, although the numbers are larger than for IRAs. Nonetheless, during many tax years, participants are unable to step up their contributions (deductible or not) to reflect actual inflation, until the next “step” is authorized.
Of government and sausage, I’ll have the bratwurst. No plant tour, please.
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