Warning: Info below primarily of interest to political and tax reform junkies
I've continued to search for details on Thompson's tax proposal. The main question I (as well as Growing Older) and probably other folks have is: How would assets now in tax free (e.g. Roths) and tax deferred (e.g. TIRAs and 401Ks) be affected.
I haven't found specific answers, but found some clues/indicators.
First: Recall that Thompson's plan offers all filers the option of continuing to file using the present system of deductions/exemptions/credits, etc. Filing using the flat tax computation is strictly optional. So, at least nobody would end up worse
off under the proposed plan.
Regarding the flat-tax computation: As mentioned above, I have not found any specific discussion concerning treatment of Roth (IRA or 401K), 401K, or TIRA by Thompson's campaign. Here's a link to his web site with info on the plan, but there aren't many details.
Thompson Plan for Tax Relief and New Economic Growth
His site does mention that his plan is based on a House of Reps Republican Study Committee (RSC) proposal. Here's a link to "details" of that plan:
(The link also compares the tax burden by income quintile between the present tax system and the proposed plan. I'd take that chart with a big grain of salt--people do modify their behavior in unpredictable ways in response to tax code changes)
The RSC plan does not address retirement accounts, but does say that Taxable Income = gross income - standard deduction ($25K for joint filers) - individual exemption ($3500 per person). I think
that means that gains from tax-favored accounts are lumped into gross income and treated just like any other taxable gains.
Thompson's plan also taxes cap gains at a rate of 15%
What I think
Thompson's plan should
- Keep the option to file using the regular system of deductions/etc. Nobody loses, no promises are broken.
- Flat Rate Computation: You get the benefit of the larger standard deduction and personal exemption. After that, the money you deposited into a Roth IRA, Roth 401K or a non-deductible TIRA can be withdrawn without being taxed (since you've already payed tax on it and it isn't new income). Gains
from these accounts should be taxed at either your income rate or the 15% cap gains rate, whichever is lower (so, filers earning less than 100K pay 10%, those in the higher 25% bracket would pay 15%). Distributions of deposited principal from a deductible TIRA or 401K would be taxed at the individual's income tax rate, and gains would be taxed at the income rate or the cap gains rate, whichever is less.
I now like Thompson's plan (at least what I can tell/guess of it). The purist in me prefers a national retail sales tax, but the press (including the conservative press) has been savaging the "fair tax," and it's evident they haven't read the details of it. It is just too hard to explain/sell, and the special interests intent of preserving their piece of the pie will not let it live. Plus, the candidate pushing it (Huckabee) comes with some negatives (from my perspective) that I just can't ignore.
Thompson's plan does significantly reduce the destructive tendency of the government to meddle with investment flows, which will enhance efficient use of these funds by the private sector.
By allowing filers to keep computing their taxes as they do now, Thompson's plan becomes politically viable. If it were enacted in a form similar to its present one, I think most folks would file under the new flat tax computation. That would be okay at first, then I think political pressure would gradually build over the years for scrapping the deduction/special credit/BS laden system as it would be seen increasingly as a tool used by those with sharp pencils to avoid paying their share.
Or, the flat system could just start piling on special bells/whistles/loopholes/gimmies like the old code did, and my faith in humanity will be lost.