Apparently, President Obama’s budget is going to include some kind of penalty for people who have accumulated more than $3 million in retirement accounts. The details are not yet known, but I think we know enough to say that this is a terrible idea. A sizable body of work in public finance suggests that consumption taxes are preferable to income taxes. Completely replacing our tax system with a better one is, however, hard. Retirement accounts, such as IRAs and 401k plans, are one way our tax code has gradually evolved from an income tax toward a consumption tax. The use of these accounts should be encouraged, not discouraged.
By the way, exceeding $3 million in such accounts is not very difficult for an individual who is financially successful and frugal. Under current law, a self-employed person can put about $50,000 a year in a SEP-IRA. If he does that every year for 40 years, and his savings earn a return of 5 percent per year, he will retire with about $6 million.
Pro Growth Liberal notes another aspect of Greg Mankiw’s outlook:
Greg explains by noting some folks can readily put away $50,000 a year. The median worker, however, cannot. But there may be something else afoot here as Brian Beutler explains:
One way experts believe financial managers avoid the current annual contribution limit to IRAs is by using IRAs to participate in investments and assigning those investment interests a nominal value vastly below fair market.
Brian cites as an example some clever tax planning done by a chap named Mitt Romney.