Money buys you things

[pktechgirlbackup]

I'm currently neglecting normal savings in favor of squeezing the last penny into my 401k. I can do this because I can be really sure I will not need that money until I am 65. I have a large cushion, and if anything truly catastrophic happened, my parents would help. I assure you I am extremely motivated not to let this happen, but I can't escape the fact that in case of expensive cancer, I can break that glass. I have friends who make more money than me who cannot do this. They need a larger cushion because not only can their parents not rescue them, they might have to rescue their parents. Or siblings. Or in laws. And come 65 (under current tax codes), even if my friends never actually gave money to their parents and I never actually accepted any from mine, I will have more money than them, because I had the flexibility to put more in my retirement account. And these are people high paying, highly secure jobs.

This strikes me as a flaw in programs like 401ks and Flexible Spending Accounts: they're more useful the more flexible your money, and flexibility is directly tied to wealth. Not even income, but wealth.

Comments

[crystalpyramid]

What's the alternative? The wealthy are going to end up wealthier, no matter what you do. I like the fact that my employer matches money I put into my 403(b) up to a percentage, but I also like knowing that if I fall on hard financial circumstances, I can turn that off and have a little more money each month. The wealthy will always have more spare money to invest at high interest rates; the poor will always be putting more of their expenses on credit cards.

[dukhat.livejournal.com]

A highly progressive tax code can counteract the tendency for wealth to concentrate.

[pktechgirl.livejournal.com]

I don't see wealth concentration as an inherently bad thing, I just think it's sufficiently rewarding that the tax code shouldn't reward it further.

[dukhat.livejournal.com]

I view it as so rewarding in our current legal and economic climate that the tax code needs to be made much more progressive (it is barely progressive). And I view a society where a very few control almost all the resources as having a fundamental problem.

[dukhat.livejournal.com]

Speaking of retirement accounts and what the rich can do, Romney's IRA is a thing of beauty. Despite contribution limits of thousands of dollars per year he managed to get 100 million into it. Presumably by investing money from his IRA into contracts that represented equity in both a company Bain was buying and some of the carried interest he had access to based on his position at Bain. Then something with a very low book value would, for any successful deal, easily grow over a hundredfold in value. Of course this makes no sense if you have to take the money out at income tax rates instead of at capital gains rates. But if you don't plan to ever take the money out yourself and instead pass it down to your children it could make sense.

[pktechgirl.livejournal.com]

My point is that this is beyond rich people having more money, this is making the money of rich people more useful. What the solution is depends on which problem you're talking about- low tax revenue? senior poverty? income inequality? Tax burden inequality?

As it happens, I think a progressive consumption (as opposed to income) tax would solve a number of problems including some of these, but there isn't much data on consumption taxes so this is a tentative position.

[crystalpyramid]

That's interesting — what is a consumption tax, and how is it different from a sales tax?

[dukhat.livejournal.com]

A sales tax is an example of a particular consumption tax.

You could approximate a direct consumption tax by giving everyone a tax free savings account, sort of like an unrestricted IRA. Anything you withdraw and spend is taxed. Another way of looking at a direct consumption tax would be like an income tax where you can deduct savings and investments.

Alternatively, it can be an indirect tax by taxing the goods people consume. So a progressive consumption tax could be a sales tax where groceries and rent are exempted from tax and "luxuries" and more expensive non-essential goods are taxed at a higher rate. Most of that could just be a formula for the tax rate based on the price of the item. Since consumption falls as a fraction of income for higher incomes one has to be careful to make sure things stay progressive.
A consumption tax implemented as a sales tax with necessities untaxed without any special features will probably hit the 2nd richest quintile hardest.

[pktechgirl.livejournal.com]

Sales tax is a form of consumption tax, but a flat sales tax ends up regressive relative to income, because people with less money spend a larger percentage of it. A progressive sales tax would raise the tax percentage as you spent more, the way income tax raises its percentage as you earn more. That's insanely hard to track (and it's even worse for VAT), so the only way I see to implement that in practice is something like 401ks with no limit contribution and no penalty for withdrawal- so income goes in your 401k as soon as you get it, and a progressive income tax is applied when you withdraw it. To duplicate the functionality of FSAs, HSAs, and 529s, we could exclude money spent on health care and education. To duplicate the charity exemption, exclude money given to charity. Etc.

Other reasons I like this: allows progressive taxation without penalizing people with high year-to-year income variability, doesn't make you make the ridiculous choice of "which tax advantaged savings program does this go in?" and screw you if you chose education and end up needing it for medical, encourages saving and consumption smoothing, which will dampen economic cycles, reduces penalty for having a stay at home spouse of a high-income worker go back to work (which is the one area where progressive income tax is provably discouraging work), and it just seems fair.