As is now being reported by even conservative news outlets like National Review and Fox Business, it appears that Republicans may seek to reduce the amount by which 401(k) contributions are tax deductible. This is fairly notable because it would negatively affect quite a few upper-middle and lower-upper class voters, many of whom likely voted Republican.
Why would Republicans do this? Because of a slavish devotion to cutting taxes to the very wealthy, not those who are just well-off.
As an example, consider Sally, a professional who earns $120,000 per year and is in the 28% tax bracket. Right now Sally can contribute up to $18,000 per year to her 401(k) before taxes, resulting in a present tax benefit (if she contributes the maximum) of 28% x $18,000, or $5,040. The Republicans may propose reducing the deductible limit to $2,400, which would provide Sally with a tax benefit of only 28% x $2,400, or $672. She will need to pay more than an additional $4,300 out of pocket to save the same amount of money for retirement.
Won’t this also hurt the very well-off? As an example consider Ted, a hedge fund manager who makes $20 million per year, mostly in the 39.6% bracket. The reduction of Ted’s 401(k) write off from $18,000 to $2,400 will reduce his tax benefit from $7,128 to $950. However, the Republicans would also like to cut the top rate from 39.6% to 35%. If substantially all of Ted’s income is taxed at this rate, this 4.6% reduction will save Ted $920,000, which quite makes up for the $7,000 hit Ted takes on his 401(k) deduction. Conversely, none of Sally’s income is taxed above 28%, meaning she would not see any benefit from the 39.6% to 35% reduction.
Put another way, around 210 upper-middle class people like Sally will need to lose most of the benefit of their 401(k)’s, in order to fund a tax cut for every 1 person like Ted.
This logic is capturing the attention of even some of the less insane Republicans, with Rob Portman (R-Ohio) saying the proposal is “deeply concerning,” and “I don’t think you want to disincentivize retirement savings in any way right now.” I would imagine he may also be thinking that this kind of thing will get his voters’ attention in a way that slashing programs for the poor would not.