Miscalcution on tax revenues by Bush I advisor

[punpirate]

http://www.nytimes.com/2003/07/27/business/yourmoney/27BOSK.html?pagewanted=2&ei=1&en=fa989a2fd6260773&ex=1060372788

Although such is not stated in the article, this paper by Michael J. Boskin may have been one of the reasons the Bushies have been pooh-poohing deficits.

Another thing the article merely glosses is the effect of bursting stock bubbles on the actual returns in taxes from deferred income. An Enron employee, for example, required to buy Enron stock as a 401(k) contribution first of all has deferred income from the top of their income bracket, and that deferral bought stock at an inflated value. When the stock fell to almost penny-stock levels, the aggregate value of the 401(k) also fell accordingly. The amount which can be withdrawn is regulated by law, and eventually, those retirees will have to withdraw money according to a schedule which is largely dependent upon their age and the amount in the account.

Someone who held $400,000 in an Enron account could be required to withdraw from that fund perhaps $20K per year in addition to all other retirement income, and that deferred income would be taxed off the top, at again, the highest rate possible (maybe not in the 33% bracket, but maybe at 25%). If that Enron account is now worth, regardless of deferred amount, about $20,000, the required amount to be withdrawn each year drops to about $1500. That amount, in addition to other retirement income such as Social Security, does not come close to being taxed at anywhere near the rate it would if the account maintained value.

The primary expectation of all such deferred income plans is that the increased value of the investment would, in combination with the rules for mandatory withdrawal, bring in more income to government than that originally expected before deferral.

And then along came Enron, and Dynegy, and Tyco and MCI WorldCom....

Cheers.