Advisers embrace tax simplification, wince at surcharge on wealthy

Some higher-income professionals would pay an extra 10%

Feb 26, 2014 @ 5:20 pm

By Mark Schoeff Jr.

While they like the idea of simplifying the tax code, financial advisers are balking at raising taxes on the wealthy and reducing retirement savings tax incentives, elements of a congressional plan to overhaul the nation's tax system.

House Ways and Means Committee Chairman Dave Camp, R-Mich., on Wednesday introduced a discussion draft of legislation that would overhaul the U.S. tax system by streamlining the current seven tax brackets — ranging from 10% to 39.6% — to two: 10% and 25%. It also would impose a 10% surcharge on some higher-income taxpayers.

The expansive proposal would affect every part of the tax code — including provisions allowing for tax-deferred contributions to retirement plans. Advocates have been fighting for more than a year to keep those incentives in place, arguing that they encourage Americans to bolster underfunded nest eggs.

Even though leaders of Mr. Camp's own party contend that there is no chance that Congress will enact comprehensive tax reform this year, the proposal is a milestone, according to observers.

“It's the first real round in the fight over tax reform,” said Brian Gardner, senior vice president of Keefe Bruyette & Woods Inc., an investment bank and broker-dealer that specializes in financial services. “It's the first time we've seen pen meet paper.”

(See who would be hit hard by Mr. Camp's tax plan)

Brian Graff, chief executive of the American Society of Pension Professionals & Actuaries, is wary.

“If it's out there, [other lawmakers] are going to look at it,” he said.

“The retirement industry has to make clear that raising taxes on retirement savings is not the way to pay for tax reform. We have to keep the drum beat.”

At a Capitol Hill news conference Wednesday, Mr. Camp acknowledged that there had to be provisions in the draft legislation to finance the lowering of tax rates for 99% of all Americans.

One way he did that is by suggesting a 10% surcharge on some single taxpayers with income above $400,000 and couples with income above $450,000.

It wouldn't apply uniformly. Those in farming and manufacturing, for instance, wouldn't have to pay the surcharge, but those in professional services, such as lawyers and financial advisers, would.

That split didn't sit well with advisers.

“You are missing the point of tax reform if you start out with an approach like that,” said Timothy Dolan, managing principal of Dolan Capital Group.

“You fail the test of fairness,” he said. “You're coming out with a system that is singling out people to pay more.”

Martin Hopkins, president of Hopkins Investment Management, also blanched at the surtax.

“I'm very much a flat-tax sort of person,” he said. “I don't agree with the concept of a progressive tax, of taxing the rich, but I understand that to get an agreement that benefits 90% of the population, you're going to have to throw it in there.”


Mr. Camp also would limit tax incentives for retirement savings to help raise revenue.

The plan would freeze contribution limits for 401(k) plans at the current $17,500 for the next decade. It also would require that any contribution over $8,750 be channeled into a Roth 401(k) plan on which contributions were taxed going into the plan but could be withdrawn tax-free in retirement.

A summary of the tax reform plan stated that 85% of retirement plan participants contribute less than $8,750 to plans annually, so they wouldn't be affected by the change.

But Bob Reynolds, chief executive of Putnam Investments, said that trimming the tax deferral is misguided.

“I'm concerned that it could be perceived by people as a negative in saving for retirement,” he said. “Anything that diminishes people saving for retirement really has to be thought through.”

Other industry leaders took a similar message to Capitol Hill on Wednesday. Robert Moore, president of LPL Financial, met with several lawmakers as part of an outreach effort by the Insured Retirement Institute.

“We need more elements of our tax law to encourage savings, not less,” said Mr. Moore, the IRI's vice chairman.


While removing income eligibility limits for Roth IRAs, Mr. Camp's plan would prohibit contributions to traditional IRAs.

Timothy Steffen, senior vice president and director of financial planning at Robert W. Baird & Co. Inc., said that a Roth-style account “is a powerful savings tool, but it's not right for everyone.”

“Clearly, [Mr. Camp] is willing to give up future tax revenue on IRA distributions in favor of not having any [tax-deferred] contributions today,” Mr. Steffen said. “It's a short-term solution, but it could backfire in the long run.”

Overall, though, Mr. Steffen is impressed by Mr. Camp's proposal.

“It greatly simplifies the tax code. If I were to design a tax plan, I would design something along these lines,” Mr. Steffen said.

Mr. Camp's plan would eliminate and consolidate many tax deductions and other tax preferences, provide a more generous standard deduction of $11,000 for individuals and $22,000 for married couples — up from $6,200 and $12,400, respectively — permanently repeal the alternative minimum tax, as well as state and local tax deductions, and trim the mortgage tax deduction.

Mr. Hopkins also endorsed the effort to prune the branches of the tax tree.

“I'm encouraged by the fact that there is the intent to bring down tax rates for most people,” he said.


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