What’s the Tax Advantage of 401(k)s?
AbstractTax reform is high on the nation’s agenda. While Republicans and Democrats may disagree about the extent to which tax increases should be part of the deficit reduction effort, they generally agree that a broader base and lower rates for the federal income tax would promote fairness and boost economic growth. The base-broadening discussion inevitably raises the question of cutting back on some “tax expenditures.” These expenditures are revenue losses attributable to provisions of the tax laws that are designed to support particular activities. Prime examples are the provisions designed to encourage retirement savings. It seems like a good time to understand the nature of these expenditures, determine how the revenue losses are calculated, think about how tax reform could affect the value of these provisions, and speculate how changes might affect participation and contributions in tax-advantaged savings vehicles, particularly 401(k) plans. The discussion proceeds as follows. The first section provides a brief overview of the role of taxes in the evolution of employer-sponsored retirement plans. The second section describes the tax advantage associated with 401(k) plans. The third section discusses the magnitude of the 401(k) tax expenditure. The fourth section highlights how the size of the tax expenditure depends on the tax treatment of capital income outside of 401(k)s. The fifth section discusses the potential impact of proposals to cut back on the 401(k) tax expenditure. The final section concludes that while some reform proposals may make the 401(k) tax expenditure more equitable, policymakers should proceed with caution because the employer-based retirement system is the main savings vehicle for American workers.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Center for Retirement Research in its series Issues in Brief with number ib2012-4.
Length: 10 pages
Date of creation: Feb 2012
Date of revision: Feb 2012
Contact details of provider:
Postal: Hovey House, 140 Commonwealth Avenue, Chestnut Hill, MA 02467
Phone: (617) 552-1762
Fax: (617) 552-0191
Web page: http://crr.bc.edu/
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ACC-2012-02-27 (Accounting & Auditing)
- NEP-ALL-2012-02-27 (All new papers)
- NEP-PUB-2012-02-27 (Public Finance)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Grzybowski) or (Christopher F Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.