President Obama has had a rough go so far this year with the gun-control setback, the sequester backfire, having to back off of his so-called “red line” threat to Syria and the likely failure of his immigration reform plans. But don’t worry, he’s got something much bigger up his sleeve. Actually, it’s already out in public, buried in his FY2014 budget proposal.
Obama wants to prevent people from accumulating too much money in their tax-advantaged retirement accounts, or trusts for heirs, adding even more tax burdens on the wealthy – this after raising tax rates in January.
The plan caps the amount people can amass in tax-deferred individual retirement accounts at $3.4 million. Amounts above $3.4 million would be taxed. The plan also requires those who inherit IRAs to take taxable distributions within five years instead of over their lifespan.
Obama’s 2014 budget proposal, released in early April, would increase estate taxes and limit techniques used by the wealthy to transfer assets through trusts. What, you haven’t heard about all of this? Let’s dig a little deeper today.
While politicians and pundits bicker about “tax reform” and a possible Internet sales tax, President Obama appears to be serious about bagging the biggest trophy of all – a “wealth tax.” He doesn’t say this, of course, so most people don’t see this coming. Should it happen, though, it will be very difficult to protect yourself.
As noted above, the plan to impose a wealth tax first saw the light of day with the president’s 2014 budget, which proposes to limit tax-deductible savings to an amount that will provide an annual benefit of $205,000. Apparently, the Obama administration believes that anyone – including the super-rich – can live comfortably on $205,000 a year.
The budget document states that “the maximum accumulation that would apply for an individual at age 62 is approximately $3.4 million.” Obama’s minions estimate that $3.4 million would provide a benefit apprx. $205,000 annually to live on, based on the average life expectancy after age 62. How do they know this? And do they think they can really pull it off?
If an individual’s tax-qualified wealth – both defined contribution and benefit plans – reaches $3.4 million, then future tax-deductible contributions would not be allowed. If the level drops below $3.4 million, say because of poor market returns, then additional contributions would supposedly be allowed.
If your tax-qualified wealth is already above $3.4 million, it is not clear how, or if, the excess would be taxed. At the moment, only tax-qualified wealth is targeted.
Let’s say one is 62 and has no tax-qualified wealth, but has financial assets of $5 million. That level, according to the president’s own calculations, would provide retirement income greater than $205,000. This starts the slippery slope. Is it fair that one retires with more wealth than is necessary to provide $205,000 per year?
Apparently not, according to the Obama administration. Maybe you should be required to pay a “wealth tax” on the amount above $3.4 million. Never mind that you already paid taxes on this money. While this idea hasn’t been proposed yet, it is a growing mantra among liberals. How many times have you heard Obama and other liberals ask:
“Shouldn’t higher-income folks contribute just a little more?”
Answer: Over and over and over. Don’t be surprised if that mantra soon morphs into:
“Shouldn’t wealthier folks contribute just a little more?”
Now you’re probably thinking: The government doesn’t know how much wealth I have, so how could they tax me on it. With the exception of IRAs (Form 5498), the government currently doesn’t know what other wealth you may have. However, it wouldn’t take much for Uncle Sam to get that information.
Each year, investors receive 1099 forms from banks and other custodians, which report dividend and interest income. Investors don’t currently receive the sum total of their assets on the 1099s, but they do in their periodic statements. If the federal government required those data, it would be a relatively trivial software application for custodians to provide year-end financial asset levels on the 1099s.
The federal government could then attempt to levy a tax on financial wealth that exceeds some threshold. The political argument has already been well tested when related to income. The American public accepts progressive tax rates, and many believe that higher-income folks should pay proportionally more.
The debate is only how much, or what marginal tax rates should apply. As it relates to financial wealth, the president could then argue that the concept is the same. It may only be a matter of time. That time could well come if the Democrats retake the House in 2014 (not likely).
With high budget deficits, frightening levels of government debt and unfunded liabilities in the tens of trillions of dollars, politicians’ appetite for additional revenue sources will not be satisfied. Obama knows this. I’ll keep you posted on this in the weeks to come.
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