THE COMING TAX TSUNAMI
January 22, 2008
Over the next 25 years American taxpayers will face a fiscal tsunami. Unfortunately, expected tax increases will make it increasingly difficult for Baby Boomers to save for retirement, say Pamela Villarreal, a policy analyst and D. Sean Shurtleff, a student fellow with the National Center for Policy Analysis.
Tax changes, especially tax hikes on capital gains and dividends, will have a significant impact on retirees and workers approaching retirement. The Tax Foundation reports that in 2004:
- The 45- to 54-year-old age group, all of whom are Boomers, claimed 22 percent of all dividend income and 22 percent of all capital gains, the highest percentage of dividends and capital gains for any age group.
- Like the cohorts before them, Boomers are likely to receive substantial income from capital gains in retirement; in 2004, 30 percent of 65- to 74-year-olds claimed capital gains, a higher percentage than any other age group.
- More than half (51 percent) of 65- to 74-year-olds reported dividend income, also a higher percentage than any other age group.
- If current tax provisions expire, the limit on contributions individuals can make to an IRA will no longer rise by $500 a year and instead will remain at the current level of $4,500 per individual.
- Baby Boomers will face new limits on their ability to put away extra savings for retirement and take advantage of catch-up contributions for those over age 50.
The way to avert this impending disaster is to maximize the opportunities for Baby Boomers to earn and save without tax penalties, while restraining spending growth on entitlements for the elderly. To do so, Congress should make the Bush tax cuts permanent and change rules to make it easier to contribute and save in personal retirement accounts, say Villarreal and Shurtleff.
Source: Pamela Villarreal and D. Sean Shurtleff, "The Coming Tax Tsunami," Heartland Institute, February 1, 2008.
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