Comment by philwelch | Hacker News Reader

Comment by philwelch | Hacker News Reader

One of the most interesting ideas I've ever heard was to make any and all savings deposits and investments tax-deductible, just like traditional IRA and 401(k) contributions--with the caveat that future withdrawals or returns are, themselves, taxable income. This transforms the income tax into a consumption tax, incentivizes savings of all kinds, and allows existing deductions and tax credits to potentially keep the tax progressive.

You could argue that people with higher incomes would pay a smaller proportion of their income as taxes, but this is beside the point--the only part of your income you can actually use is whatever you don't save or invest, and though you can just keep your savings and investments compounding indefinitely, you have absolutely no incentive to do so unless you are planning or anticipating for some future point in time where you or your heir withdraws and spends some of that money, which is exactly the point when that (typically much larger) sum turns back into taxable income.

I think a simpler approach would be to eliminate 401k and similar programs, increase the IRA limit, and allow employers to contribute to an employee's IRA in the same way as a typical payroll deposit. That would make things _way_ simpler for everyone, and maybe people would feel confident enough in their understanding of retirement accounts to actually use them...

We don't need _more_ accounts, just simplify the ones we have and consolidate.

How is that simpler than just letting every existing savings or brokerage account act like an IRA with absolutely no contribution limit or penalty for early withdrawal? That doesn't create more accounts, it just gives the existing tax benefits (and then some!) to the accounts that everyone already has. You would probably end up just eliminating the 401(k) and IRA classifications and converting those accounts into normal brokerage accounts.

That would be quite the tax dodge. It lets you spread income over many years, whichever way has the lowest tax rate.

Right now we charge someone who earns their lifetime income in 20 years much more tax than someone else who earns the same total income over 40 years. A change like this would remove this unfairness, but to collect the same total amount (over say 60 years for both now) the brackets would surely be different.

If you get the same amount of money and then twenty years of leisure, surely you are meaningfully better off than someone that had to work forty years for it?

Fair point. How about a decade off raising kids?

I'm sure it isn't intended this way, but this feels a little like a trick question. Certainly there are benefits to society to people having children and raising them well. But I don't think anyone has children and takes a decade off to raise them because it benefits society. Rather they do so because it is something they want to do. Give that, if we take someone that made $x dollars over 40 years of work and someone else that made $x dollars over 30 years of work and took ten years off to raise kids, I would say the latter is better off. That said, maybe we want to adjust the tax system to favor the that second person anyway because of the spillover benefits, but that's a different question than who is better off.

Sorry not intended as snark, I do think you raise a good point, and may yet dim my enthusiasm for pure consumption taxes. But would be good to generate more examples to think through.

One unfairness is people who have spiky incomes, like a guy who repeatedly builds companies & sells them off, 4 years on ramen & 1 big payoff -- it does seem unfair to put him in the tax bracket of those with 5 times his average income. I have an idea many countries would let him smooth this out already, but don't know the details.

Sure, but I think this would actually help a lot of working or middle class folks more than it would help the rich. If you were rich, it wouldn't really matter how much you "spread income" because your typical standard of living would exceed the higher tax brackets anyway. So this would actually be a benefit to working-class or middle-class folks with inconsistent and bursty income, which is a good outcome.

If you were worried about say, frugal people with large amounts of generational wealth, you can also pair this with a big fat estate tax.

This would likely need to coincide with a flat federal sales or value added tax (VAT) to properly tax consumption activities.

Example: 12% tax on a Bentley or Toyota, Yacht or toy boat, wealth advisor service or lottery ticket

This would already be a federal tax on consumption activities.

That is how pensions work in the UK, with an upper annual limit on savings and a lifetime allowance.

So we live in an ecosystem: one lever cannot be pulled without substantially effecting that ecosystem

In this case, the last decade of monetary policy has been about pushing people to find passive savings unattractive. Their dreams of generational wealth from merely having a savings account totally wrecked because their life span cannot withstand the paultry compounding interest at a fraction of a percent.

Therefore creating incentives like you have imagined would further be at odds with the goal of keeping the money supply circulating, instead of parked in passive accounts.

The point is to keep everyone desperate for returns and using their entire mind share to find the best returns. Amongst the winners and failures you have individuals throwing their money across asset classes and the entire planet, which allows for easy accounting of the money supply and high velocity.

With fractional-reserve banking, this proposal keeps supply circulating.

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