We are just days away from the Iowa caucuses and the New Hampshire primaries, the first major milestones in the 2016 presidential race. Whoever wins the White House will have a tremendous impact on key issues affecting the retirement industry. Tax reform is a real possibility in the next Congress, and it is likely that the next administration will be tasked with overseeing the implementation of the Department of Labor’s fiduciary rule, which may not be effective until early 2017. With so much at stake, it is important to carefully consider where the candidates stand on issues affecting the industry.
Tax reform is a perennial issue for politicians running for higher office, and this year is no exception. Candidates on both sides of the aisle have begun to outline their visions for the future of the tax code. Some proposals look much like the current tax code, while others would do away with the income tax structure altogether and move to a value-added tax (VAT). Coming up with the funds to pay for the tax revenue lost as a result of these tax code changes could lead to reduced tax breaks for retirement savings.
To date, GOP nominee hopefuls have been the most focused on tax reform, and nearly all of the candidates have put forth proposals with the stated goals of lowering rates and simplifying the tax code. While none of the candidates have expressly called for changing the tax treatment of existing retirement plans, it seems likely that any plan that hopes to be revenue neutral (e.g., Donald Trump’s plan) or radically rewrite the tax code (e.g., Sen. Ted Cruz’s plan) would affect the retirement system, either by reducing the current tax preferences to generate additional revenue or by eliminating the current tax incentive altogether.
The five leading Republican candidates (according to an average of national polls) have proposed the following:
- Donald Trump has proposed replacing the seven current individual tax brackets with four brackets: 0%, 10%, 20% and 25%. He has also proposed reducing the long-term capital gains rates and setting a maximum corporate tax rate of 15%. Trump proposes to pay for tax reform by “reducing or eliminating most deductions and loopholes available to the very rich.” His plan does not specifically target retirement plans, but in order to have revenue neutral rate reductions (a component of his plan),
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he would likely need to reduce the tax preference for employer-provided retirement plans. At the very least, his promise to reduce or eliminate “loopholes” for the rich could result in caps on aggregate exclusions and deductions for certain taxpayers, which could indirectly affect the utility of retirement plans for high-income taxpayers. - Sen. Ted Cruz would replace the current income tax rates with a flat rate of 10% (after applying a standard deduction and personal exemption) and eliminate the payroll tax, which funds Social Security and Medicare. Although not detailed in his plan, Sen. Cruz released a sample flat tax filing form, which includes a deduction for “savings plan contributions. He would replace the corporate income tax with a 16% VAT. Cruz would presumably continue to allow individuals to make tax deductible contributions to retirement plans. (He also specifically calls for allowing people to save “up to $25,000 annual tax-deferred” in a “Universal Savings Account.”) However, VAT systems typically tax businesses on their payroll, and there is no indication that Sen. Cruz is proposing to subtract contributions to retirement plans from taxable payroll.
- Sen. Marco Rubio would create three new tax brackets for individuals (15%, 25% and 25%) and eliminate the tax on capital gains and interest income. He would also reduce the tax rate for all businesses to 25%. The elimination of capital gains taxes would significantly reduce the incentive for people to participate in retirement plans. Sen. Rubio has also called for expanding access to retirement savings accounts by making the Thrift Savings Plan — the savings program for federal workers — available to the public.
- Dr. Ben Carson would replace the current income tax with a 14.9% flat tax for individuals (on income above 150% of the Federal Poverty Level) and corporations, eliminating all “deductions, tax shelters [and] loopholes.” He would also eliminate the taxation of capital gains, dividends and interest income for individuals. It appears that Dr. Carson would eliminate the tax preference for retirement plans entirely, although his plan does not say so specifically. Regardless, retirement savings plans would become considerably less attractive if Carson were successful in eliminating taxes on investment income.
- Jeb Bush would establish three tax brackets for individuals (10%, 25% and 28%) while increasing the standard deduction. He would reduce the top corporate tax rate from 35% to 20% while reducing capital gains, dividend and interest income tax rates to 20%. Former Gov. Bush’s plan does not appear intended to significantly affect private retirement plans. In fact, he has proposed creating “starter 401(k)s” and allowing workers and businesses to “pool together to access a single retirement plan in an effort to reduce complexity” (e.g., open multiple employer plans). Those proposals are likely intended to be similar to the ones put forward by Sen. Orrin Hatch (R-Utah) in the last Congress (S. 1270, 113th Cong.).
To view our look at the tax reform proposals of the Democratic candidates for president, click here.
Michael P. Kreps is a principal at Groom Law Group, where he counsels employers, plan sponsors, financial institutions, trade associations and coalitions on retirement, health, tax and employment matters. Previously, he served as the Senior Pensions and Employment Counsel for the U.S. Senate Committee on Health, Education, Labor, and Pensions from the 110th through the 114th Congresses.
Kevin L. Walsh is an associate in the Title I group at Groom Law Group. He previously worked in the U.S. House of Representatives, first with the Committee on Financial Services and later as a legislative assistant for the late Rep. Michael Oxley (R-Ohio). He also served as a law clerk for Judge D. Michael Fisher of the U.S. Court of Appeals for the Third Circuit.
