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How to Destroy the Middle Class

November 14th, 2008

Obama’s propsal, to eliminate (or virtually eliminate) 401(k) type plans, might be the single largest effective tax-rate hike in the history of the world.

Take for example, an average worker earning something like $50k per year, who contributes $150/pay to a 401(k) type account, and the employer matches at .75/$. The net contribution is $262.50.

If he’s not putting money in to the account, neither is his employer. Using my estimates from above, Obama’s plan would rob him of $225/month in deferred compensation (which would eventually be subject to tax, anyways!). That’s $2,700 annually. Additionally, his income subject to taxes would increase by the amount of money he’d no longer be allowed to sock away for the future: an additional $3,600 per year. Assuming an average tax liability of 30%, our hypothetical, median worker would see his tax bill increase by over $1,000.

I’m sorry if you believed that line about “Only people earning more than $250,000 a year,” you’re in for one hell of a surprise. And, if you thought it was OK to raise taxes on other people, just so your own tax bill wouldn’t go up, you’re a sorry excuse for a human being, because all forms of taxation are really theft.

The only plan that could rival or exceed the 401(k) elimination in magnitude would be the elimination of the Mortgage Interest Deduction. For a $165,000 home at 7%, the owner would see his income subject to tax increase by something like $10,000 in the first year, in all likelihood a $3,000 increase in his total tax liability.

Fortunately to my knowledge (and I may be mistaken), this hasn’t yet been seriously considered.

Comments

3 Comments

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  • KipEsquire says on: November 14, 2008 at 4:28 pm

     

    I see nothing in the link about eliminating 401(k) plans.

    I blogged about some blather in a Congressional committee about the idea. But I have never seen anything from the Obama campaign on it.

  • Jeff Molby says on: November 14, 2008 at 6:08 pm

     

    The only plan that could rival or exceed the 401(k) elimination in magnitude would be the elimination of the Mortgage Interest Deduction. For a $165,000 home at 7%, the owner would see his income subject to tax increase by something like $10,000 in the first year, in all likelihood a $3,000 increase in his total tax liability.

    I actually support the repeal of the Mortgage Interest Deduction. It creates a ridiculous incentive to maintain a low amount of home equity.

    I’d want to see it accompanied by an across-the-board cut to keep it taxation-neutral, but I think any towards eliminating these constituency bribes is a good thing.

no third solution

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