WASHINGTON–A presidential commission has proposed simplifying the tax system by consolidating retirement accounts and harmonizing statutory requirements, among other revisions.
The proposals were part of a 118-page report released Friday by the President's Economic Recovery Advisory Board, chaired by Paul Volcker.
Other options suggested in the report to simplify and expand retirement and savings provisions were a suggestion that IRA and 401(k)-type contribution limits be integrated and nondeductible contributions be disallowed.
In addition to simplifying the tax code, the objective of the task force was to suggest ways to improve taxpayer compliance with existing tax laws and reform the corporate tax system.
The board was asked to consider various options for achieving these goals but to exclude options that would raise taxes for families with incomes less than $250,000 a year.
"We interpreted this mandate not to mean that every option we considered must avoid a tax increase on such families, but rather that the options taken together should be revenue neutral for each income class with annual incomes less than $250,000," the task force said.
Other options on retirement income suggested by the task force included consolidating and segregating non-retirement savings; clarifying and improving savings incentives; reducing leakage of funds from retirement accounts; simplifying rules for employer-sponsored plans; and simplifying mandatory distribution mandates.
On consolidation of retirement plans and harmonizing statutory requirements, the task force noted a wide variety of rules across plans.
"We heard that individuals can be intimidated and confused both by the sheer number of accounts to choose from and by the fact that each account is governed by a different combination of rules regarding eligibility, contribution limits, and when money may be withdrawn," the task force said. "We heard concerns that this confusion reduces take-up of retirement plans by workers and the propensity of employers to offer plans, with negative effects on the goal of increasing saving. Given that saving incentive provisions in the tax code are the third-largest tax expenditure–costing $118 billion in 2008–it is imperative that their public benefits justify their cost."
The group also cautioned that consolidating retirement accounts could increase the administrative burden on small firms while ultimately producing only modest benefits.
The task force said one proposal would allow all workers regardless of income to contribute to either or both an IRA and an employer-sponsored plan.
Eliminating nondeductible contributions to traditional IRAs would reduce the number of IRA vehicles and would simplify recordkeeping for participating taxpayers, the task force said. Complicated IRA qualification and phase-out rules would be repealed, which would also encourage additional end-of-tax-year saving by workers with employment-based retirement coverage, the task force suggested.
The disadvantage of this change is that it could reduce government revenues because increasing IRA eligibility would result in greater take-up, the task force cautioned.
Moreover, "eligibility would be increased primarily at higher income levels," the task force said. However, "both concerns are reduced by the fact that most high-income taxpayers generally already have access to more generous plans."
Another downside noted in the report is that integrating contributions up to a combined limit would add some complexity to tax calculations by requiring individuals to track contributions in multiple accounts and ensure that the sum of contributions fell below the limit allowed by the Internal Revenue Code.
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