Hillary Clinton continues on her firm path to the Democratic nomination after a decisive win in her adopted home state of New York.
In fact, despite a string of losses to upstart candidate Bernie Sanders in the prior weeks, the margin of her delegate lead over Sanders beginning in early March has been consistently greater than Barack Obama’s lead over Clinton herself in 2008 at any point in that year’s Democratic primary.
In early March, the Tax Policy Center compiled a comprehensive analysis of those proposals. In total, Hillary Clinton proposes to collect $1.1 trillion in additional revenue over the next 10 years, primarily through new taxes on very high income earners, but also through various curbs in the retirement savings incentives that we have seen in President Obama’s past budget proposals.
The new Clinton tax plan imposes an additional 4% surcharge on any income (ordinary income, capital gains, or dividend income) over $5 million per year. Another complex proposal would implement the so-called Buffett Rule by imposing a new minimum tax that would equal 30% of adjusted gross income (AGI) phased in at an AGI over $1 million less a credit for charitable contributions. The plan also increases the top estate tax rate to 45% and lowers the value of the estate tax exclusion to $3.5 million. Presumably, these new taxes on very high income earners would create further incentives for business owners to create and use retirement savings vehicles, like 401(k) plans, in order to defer tax on that income.
However, that is balanced out with other Clinton tax proposals that would limit the retirement savings tax incentives for higher income earners. For instance, the Clinton tax plan proposes to limit the value of the retirement tax deferral to a deduction rate of 28%. That proposal represents a double tax on the 401(k) savings for any individual subject to an income tax rate above 28% since there is suddenly a surtax on those individuals’ contributions to their 401k plans (while their distributions are still subject to full ordinary income tax rates).
Another proposal would cap the amount an individual could have in retirement accounts to $3.4 million (or the amount necessary to provide for an annual annuity benefit of $210,000). If a small business owner did the right thing and saved successfully or has a pension plan, they will not be allowed to save any more if these caps are hit. Without further incentives for the business owner to keep a 401(k) or defined benefit plan under these circumstances, many plans will either shut down or reduce employer contributions.
In sum, Hillary Clinton’s tax proposals are a decidedly mixed bag – the incentives her proposals would provide for increased retirement savings are largely indirect, while her stated proposals that directly impact retirement savings, if enacted, would almost certainly be a negative impact on those programs. Consequently, her thoughts on the topic of retirement savings and adequacy need to be closely monitored.
Andrew Remo is the American Retirement Association’s Director of Congressional Affairs.
