I know my readers reasonably well, and I’d guess few saw “Iron Man.” The movie grossed more than $100 million its opening weekend, the second-best performance ever for a non-sequel. That’s lots of people and money — but you had nothing to do with it.
So it is with capital gains and pension savings. Lots of people and staggering amounts of money are involved, but unless you’re at the top, it’s got little to do with you.
This statistics lesson is part of what I hope will be my continuing debate with Rep. John Shadegg, R-Ariz., who doesn’t like my criticism of his “Homeowner Empowerment Act” — a fight I welcome. Shadegg doesn’t want to get government involved when we can trust the financial services industry instead to help you avoid foreclosure.
After all, who does a better job of keeping your interests paramount? Maybe Las Vegas casino owners, but it’s a close call.
(I’m talking about the product developers — those financial geniuses who developed the “liar loan,” who gamed the rating-agency models so bad loans could be sold in seemingly solid packages, who passed on the risks but kept their fees, who have the huge compensation packages, and who now have the government guaranteeing their debts. My stockbroker? She’s as honest, and nearly as attractive, as a casino dealer.)
So when you read that the 2004 Survey of Consumer Finances (the 2007 data aren’t available yet) showed that 44.5 percent of households with at least one worker participated in a tax-deferred retirement plan, or that total retirement plan savings in 2007 were $17.5 trillion, remember those are “Iron Man” numbers. Replace “young” with “rich” to gauge your chances of being involved.
SCF data show that a majority of employed households (more than 55 percent) don’t have any tax-deferred pension plan. Also, “employed households” excludes those with unemployed workers — and who’s more at risk of foreclosure? And those savings are heavily weighted to those at the top of the heap; the SCF data report that two-thirds of households headed by a worker between 55 and 64 had less than $88,000 in retirement savings.
Capital gains are similarly concentrated. Lots of taxpayers have capital gains, but most taxpayers have very little, and most capital gains occur among those at the top. Using 2005 data, the wealthiest 10 percent got 90 percent of long-term capital gains, with the top 1 percent getting almost 70 percent. As for Americans at the 60th percentile and below — they got 2 percent.
So you’ll hear that middle-income taxpayers have capital gains, and would benefit from a capital gains tax cut. And that’s theoretically true; in 2005, taxpayers in the middle 20 percent of the income distribution averaged $176 in long-term capital gains. Therefore, a 10 percent cut in the capital gain rate would save that median taxpayer $17.60.
Meanwhile, taxpayers in the top 1 percent were averaging $232,824 in capital gains — so they’d save $23,282. It’s a good trade for the economic elite, tipping the median taxpayer less than $20 to corral a $23,000 tax break.
The people at greatest risk of foreclosure aren’t those with excess assets in their retirement plans. They may not even have retirement plans at all; the SRC data show that 50.6 percent of heads of families in the lowest 20 percent of incomes didn’t participate in employer-based pension plans, while in the top 10 percent of incomes, only 5 percent declined to participate. Who’s more likely to need help, the two-thirds of households with less than $88,000 in pension savings, or the top tier of households that hold the vast majority of that $17.5 trillion?
So allowing people to withdraw money temporarily from a 401(k) or IRA to pay a mortgage is like offering sick people a tax break for not getting medical treatment. (Which is exactly John McCain’s health care plan; notice the trend here?) It’s a “cure” that those suffering the disease just can’t use.
And that’s why Shadegg’s proposal is unhelpful, impractical and regressive. Just look at the numbers, whether or not you ever see “Iron Man.”