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Senate’s Tax Reform Hearing Touches Retirement Incentives

The tax incentives currently extended to workplace retirement plans are a potential casualty of a tax reform proposal that was the subject of a Senate Finance Committee hearing that included testimony from American Retirement Association Director of Retirement Policy Judy Miller.

Under the unlikely name of “corporate integration” (and the even more unlikely hearing title of “Integrating the Corporate and Individual Tax Systems: The Dividends Paid Deduction Considered,” the hearing focused on a tax reform proposal that seeks to address the current “double taxation” of corporate dividends by providing corporations with a deduction for dividends distributed, similar to that currently afforded debt payments. However, as Ranking Member Ron Wyden (D-Ore.) suggested in a tweet during the hearing: “‘Corporate integration’ is bureaucratic-ese for taxing big companies less & taxing retirement plans more.”

Senate Finance Committee Chairman Orrin Hatch (R-Utah) in his opening remarks called corporate taxation “out of step” and said that it “contributes significantly to our anti-competitive business climate” and leads to efforts to minimize taxes or manage competitive tax pressures from overseas. He warned that “without significant reforms to the corporate tax system, we will continue to see an erosion in our overall tax base along with diminished growth and investment.”

Retirement Concerns


However, Hatch who has been a supporter of the private retirement system, and who has introduced legislation designed to help spur expansion of retirement plans, particularly among smaller employers, also acknowledged, “Some groups — including tax-exempt entities and retirement plans — may have some concerns with a dividends paid deduction. However, at the end of the day, I believe we can craft a system where these parties will be treated in a manner that is comparable to current law, in fact, in many cases will likely be better off.”

Wyden took issue with the chairman’s contention that corporate integration could help retirement saving, saying, “It looks, on its face, like this proposal could go from double taxing corporate income to double taxing retirement plans.” The reason, he said, is that corporate integration would entail withholding a chunk of the dividends and interest payments that go to retirement plans, which, he says, means that for middle-class savers “suddenly they could get hit with a big, new tax bill for the first time.” Wyden said that if such a change were made, “their special tax-deferred status — which today is the key that unlocks opportunities to save for millions of Americans — would go away.”

Miller offered a spirited defense of the role existing tax policy plays in encouraging and facilitating retirement saving. “The tax incentives for employer-sponsored plans in place today do an efficient and effective job in allowing Americans across the income spectrum to build a secure retirement,” she said. “These incentives play a critical role in encouraging small business owners to establish and maintain a qualified retirement plan. Nondiscrimination rules combined with compensation and contribution limits assure that non-highly compensated employees also benefit from these programs.”

“The current tax incentives play a critical role in encouraging small business owners to establish and maintain a qualified retirement plan,” Miller testified.

Miller argued that corporate integration would accomplish the opposite of what Hatch hopes regarding retirement saving. “Proposals such as corporate integration that would reduce the incentives for small business owners to save for themselves through a qualified retirement plan will discourage the establishment and maintenance of these retirement plans, and so reduce the availability of workplace retirement savings,” she told the committee.

“Corporate integration would result in taxation of dividends and interest earned by the plan’s investments while held in the plan, with the contributions and remaining investment earnings taxed again when the amounts are withdrawn from the plan,” Miller said. “The result,” she noted, “would be a substantial reduction in the tax incentive to save through a qualified retirement plan relative to current law.” Further, she said, “In fact, corporate integration without recovery of amounts withheld on dividends and interest paid to a qualified retirement plan’s trust effectively eliminates the tax incentive for saving through a qualified retirement plan to the extent investment earnings are attributable to dividends and interest.

“The loss of deferral of income tax on dividends and interest with corporate integration would significantly reduce, and for more conservative investors even eliminate, the tax incentive for saving through a qualified retirement plan,” Miller warned. “Given the costs and obligations that come with sponsoring a qualified retirement plan, the result would be a reduction in the number of plans sponsored by small businesses, and a loss of coverage, and retirement security, for small business employees,” she added.

But it would not stop there, according to Miller: “Small business employees would not be the only ones to suffer, however. The lack of deferral of income tax on dividends and interest will reduce the account balances of any participant whose account is invested in an asset that pays interest (or dividends to the extent dividends payable on the investments held by the plan do not increase sufficiently to cover the withholding), and do serious harm to the retirement security of American workers.”

Wyden closed his remarks with a nod to Miller, recognizing her contributions during and before her tenure with the ARA. “Judy served as a senior pension advisor to this committee under Senator Baucus for four and a half years. She’s also testified before the committee a number of times. I’d like to congratulate and thank Judy for her service and invaluable advice over the years and wish her well in the future,” Wyden said.


Testimony was also provided by Michael J. Graetz, Wilbur H. Friedman, Professor of Tax Law and Columbia Alumni Professor of Tax Law at Columbia University, Steven M. Rosenthal, Senior Fellow, Urban-Brookings Tax Policy Center, and Bret Wells, Associate Professor of Law, Law Center at the University of Houston.