As Republicans flesh out details of their tax plan, one target for reform should be the “required minimum distribution” (RMD) rules for retirement accounts. The rules generally require that people begin withdrawing from their 401(k)s, 403(b)s, and traditional IRAs at age 70½ whether they need the cash or not.
The RMD rules are misguided, and policymakers should repeal them.
In writing this study on savings, I came across a Wall Street Journal piece arguing for liberalizing the RMD rules. Accountant Ed Slott says that the “government should raise the age for required minimum distributions to at least 80—if not eliminate it altogether.”
Here are Slott’s points:
- People are living longer today than before, so the RMD rules should be updated “to more accurately reflect today’s increased longevity.”
- Many people want to keep working, but “RMDs are particularly onerous for seniors who still have employment income and don’t need to tap savings for living expenses ... No one should be forced to pull money out of an IRA while they are still working. When combined with a paycheck, these distributions can substantially increase taxable income . . . resulting in a higher overall tax bill that prematurely eats away at retirement balances.” The government should not discourage seniors from working, and the RMD rules can do that.
- Policymakers who resist tax cuts would likely oppose RMD repeal. But Slott argues, “Uncle Sam won’t be denied his cut, even if the funds are never withdrawn during our lifetimes. The income-tax bill never goes away since there is no step-up in tax basis at death with IRAs or 401(k)s, as there is with nonqualified retirement funds and other assets. Whoever withdraws the taxable IRA or other retirement funds will pay the income tax whenever it is withdrawn.”
- Slott notes that a round number such as 80 would make for simpler RMD rules than the current 70 ½. The half age thing is just one way that RMD rules are complex, as this WSJ article discusses. Full repeal of the RMD rules and penalties would be a great way to simplify the tax code.
Here is the most important issue: the RMD rules are anti-saving. By requiring withdrawals, they encourage consumption. Yet it is good for everyone when people save more. It increases financial security, reduces dependence on government, and generates larger pools of savings to support economic growth.
So repealing the RMD rules is a winner. Simpler tax code. Support for thrift, saving, and continued earning. Greater flexibility in retirement finances. More freedom with less government rules.
For a further discussion of the RMD rules see here and here.
For more on spurring savings with tax reform, see this report on Universal Savings Accounts.
Should judges consider evidence that’s inadmissible at trial when deciding whether to certify a class for class-action litigation? Particularly given the serious consequences of certification—most defendants settle class actions to avoid greater liability, and non-certified cases are often not worth pursuing—due process should require that evidence presented at the class-certification stage meet the same standards as that presented at trial.
One case out of California illustrates how allowing inadmissible evidence in any part of a legal proceeding not only violates the due-process rights of defendants and absent class members, but contradicts recent Supreme Court rulings and the Federal Rules of Civil Procedure. Maria del Carmen Pena is the lead plaintiff of a group of agricultural employees alleging that they were denied breaks due them under the governing law. Pena tried to gain class certification by presenting a spreadsheet summarizing work hours, but this evidence was inadmissible for trial purposes because it was created by her attorney.
Nevertheless, the district court certified the class and the U.S. Court of Appeals for the Ninth Circuit affirmed. Cato has now filed a brief supporting the employer's cert. petition, urging the Supreme Court to address just that evidentiary issue.
If, as the Supreme Court recently said in Walmart Stores, Inc. v. Dukes (2011), “mere allegations” are insufficient to support certification, then it is also wrong to allow otherwise inadmissible evidence to provide the foundation for certification. Because the Court insisted in Dukes that “certification is proper only if the trial court is satisfied, after rigorous analysis, that the prerequisites of Rule 23(a) [laying out the requirements for class certification] have been satisfied,” lower courts should consider examinations of both fact and legal merits when determining if certification is appropriate.
Adhering to the 1974 decision of Eisen v. Carlisle, in which the Court held that, “for purposes of determining certification, allegations made in the complaint are taken as true and the merits of the claim are not considered,” many lower courts avoid considering any issue at the certification stage that may overlap with a question on the merits—and thus have avoided requiring that evidence used to certify a class meet the normal standards for admissibility.
But Dukes established that due process demands a rigorous inquiry (which sometimes may go beyond the bare pleadings) before certification. When courts accept inadmissible evidence to support class certification, the basic requirements of due process are compromised. Once certified, expenses and risks often compel settlements divorced from merit considerations; certification is, as the Eleventh Circuit has explained, “the whole ball game.”
Absent class members also suffer because it is the act of certification that determines whether they are bound by a settlement or adverse judgment that wipes out their individual claims. Unfortunately, confusion over the decades-old holding in Eisen lingers; a refusal to view it in light of the Court’s more recent decisions has resulted in an inconsistent application of evidentiary standards.
The Court should take up Taylor Farms v. Pena, dispel confusion among lower courts, and protect due-process rights by clarifying that evidence submitted at the class-certification stage must meet the same time-tested standards as evidence submitted at trial.
The Republican tax reform framework envisions cutting the federal corporate tax rate from 35 to 20 percent. There may be pressure in coming weeks to scale-back some of the framework’s pro-growth provisions in order to hit revenue targets, but policymakers should stick with their corporate rate target.
Various groups have modeled the revenue effects of proposed corporate rate cuts, but they generally do not account for the full dynamic effects of reform. We can get an idea of the full effects by looking at actual reforms abroad.
Sharp corporate tax rate cuts in Canada and Britain do not seem to have lost those governments much, if any, revenue. That is likely because companies responded with a wide range of real and paper changes that increased their reported income. The same would happen in the United States, which is why dropping our rate to 20 percent would probably not lose revenue over the long term.
Here is some evidence. For 19 OECD countries with good rate and revenue data back to the 1960s, I calculated the average corporate tax rates and average corporate tax revenues as a share of GDP. The chart illustrates the Laffer Curve effect of chopping high tax rates on a mobile tax base—rates go down, the tax base expands, and revenues remain strong.
From 1985 to 2005, corporate tax revenues as a share of GDP soared even though the average tax rate across the 19 countries fell from 45 to 29 percent. Then there is a sharp drop in revenues in 2010, presumably because of the recession or slow growth in many countries at the time. But note that even in the poor economic climate of 2010, corporate tax revenues were the same or higher than in years prior to the 2000 boom year.
By 2015, revenues were rising again even as the average tax rate continued to fall to a new low of 24 percent. The average revenue for these countries in 2015 at 2.9 percent of GDP is below 2000 and 2005, but above all prior years when rates were much higher.
The 19 countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Spain, Sweden, United Kingdom, and the United States.
OECD revenue data is here and rate data is here. I used the central government rates because I have not found a source for subnational rates prior to the OECD data, which goes back to 1981. As a result, the revenues (which include subnational) and the rates (which do not) are not an exact match, but that is not a big problem for illustrating trends over time.
A decade after the start of the 2007-2008 financial crisis, and seven years after the passage of Dodd-Frank, it seems both the legislative and executive branches may be making small steps toward financial regulatory reform. Earlier this month, the Treasury Department released the second in a series of reports on the U.S. financial sector, this one focused on the capital markets. And last week, the House Financial Services Committee passed a suite of bills aimed at reforming many areas of financial regulation.
While passing out of committee is only the first of many steps toward legislation, it is encouraging that several of the House bills passed with either unanimous or bi-partisan support. Although the House notably passed the CHOICE Act earlier this year, a bill that would serve effectively as a repeal-and-replace template for Dodd-Frank, that bill passed on a strict party-line vote, with only Republicans voting in favor. Therefore the fact that many of the most recent bills had some support from Democrats may bode well. Of course, any action will require the Senate as well. There has not yet been a Senate answer to the House CHOICE Act, although there is still time in the year.
As for the Treasury report and recent suite of House bills, they’re a mixed bag. On the whole, they take up several recommendations that many of us have been pushing for a while now. For example, the Treasury report recommends that all companies considering an initial public offering (IPO) be permitted to file confidentially and “test the waters,” that is, sound out potential investment interest before pulling the trigger on a costly IPO. Right now, only companies below a certain size are permitted to do this. There has been widespread concern about how few IPOs have taken place in recent years, and how few public companies now exist. Given the fact that investment in privately-held companies is tightly restricted, if companies eschew the public capital markets, average investors lose out. This change is one that may entice more companies to go public, with little risk to either investors or the markets.
Other changes would be half-measures, better than the status quo but still short of the mark. For example, both the Treasury report and one of the House bills address the restrictions on investment in private companies. Under current securities laws, investment in private offerings is effectively limited to institutions and wealthy individuals, defined as those who either earn at least $200,000 per year or have at least $1 million in assets excluding their primary residences. Both the Treasury report and the House bill would expand the definition, including individuals who can show financial sophistication through licensure or other means.
Expanding the definition is certainly a start. As it stands, existing regulation has absurd results. For example, an investment advisor who advises wealthy clients can recommend investments she herself cannot make since current law deems her insufficiently sophisticated if she is not also wealthy. Expanding the definition to remedy this would at least make the results less ridiculous. But this change doesn’t go far enough. Why should there be any restriction on how a person can spend money he has actually in hand? After all, anyone can spend money on all kinds of silly purchases thankfully without government interference. But if a person would prefer to make an investment with that money, current regulation is patently paternalistic: if the person is not wealthy, he, for the most part, cannot use that money to invest in private companies.
Another half-measure concerns a bill that would repeal the controversial Department of Labor rule governing broker advice for the sale of retirement investments. This rule, which would require those providing advice while selling certain investments to adhere to the very stringent “fiduciary duty” standard, has been criticized on two grounds. First, that the Department exceeded its authority, shoe-horning the rule into its limited jurisdiction over employer-sponsored retirement accounts. Second, that the rule itself would result not in better advice for moderate income Americans, but no advice as brokers abandon low-value accounts due to the increase in compliance costs the rule would impose. Repealing the rule is a good place to start. However, the bill passed by the House committee would only remove the rule from the Department of Labor’s (DOL) jurisdiction. While it does not expressly impose a fiduciary standard, as the DOL’s rule does, it still uses language suggesting a heightened duty of care. Brokers are in reality salespeople who give recommendations incidental to that role. There may be some argument for requiring that such brokers disclose the fact that they may be paid based on a commission structure, to ensure that investors are not confused about their role. But any rule must ensure that the compliance costs of a higher duty of care does not outweigh the benefits, or place inappropriate requirements on those in a sales role. Otherwise the result is likely to be reduced access to information for the people who need it most. In fact, some initial reports show that this has already begun to happen in some firms under the current DOL rule.
The efforts by Treasury and the House Financial Services Committee are welcome. It is encouraging that some of the House bills passed with considerable support from both political parties. Given the breathtaking scope of Dodd-Frank’s changes, and the harmful effects it has had on the economy, any change is welcome. But there is still much, much more that can and should be done.
As any child of five can tell you, taking a toy away in exchange for the promise of some future benefit does not change the fact that the toy was taken in the first place. This is also true of real property: A token gift of potential unknown value in no way changes the character of the initial taking. Under Supreme Court precedent, when all value of real property is regulated away, a taking has occurred and just compensation is due.
Gordon and Molly Beyer found themselves in just such a situation when they were informed that the nine-acre island in the Florida Keys they bought in 1970 for $70,000, intending to build a retirement home, had been reclassified as a bird rookery, requiring them to leave it in its natural state. Their island was zoned for general use at the time of purchase, but various regulatory actions restricted use over the years until the Beyers were informed that their property rights had quite literally gone to the birds. In exchange for the loss, they were awarded 16 nonmonetary, rate of growth ordinance (ROGO) points that might be sold to another property owner who wished to develop their land.
The Beyers pursued administrative review and inverse-condemnation proceedings, where a state court ultimately determined that no uses other than primitive camping and picnicking were allowed on the property, but that no taking had occurred. This was because the Beyers had no reasonable, investment-backed expectations for use of their property and because the award of ROGO points satisfied any expectations they had (if this is confusing to you, you’re not alone).
A series of fruitless appeals followed until finally in 2016, the Florida Supreme Court declined to hear the case. The Beyers―through their estate's representative; the litigation dragged on so long that they've both passed away―are now requesting that the Supreme Court take their case. Cato has filed an amicus brief* supporting their petition and urging the Court to provide desperately needed clarity to regulatory-takings jurisprudence.
We argue that the Beyers were subject to a total taking and deserve just compensation for that loss. Giving them ROGO points does not change that analysis. Additionally, when engaging in an ad hoc, factual inquiry, courts must follow the Supreme Court’s instructions to consider three factors—economic impact, interference with investment-backed expectations, and the nature of the government action—rather than inappropriately focusing on just one of the three. Courts must consider how and when property owners form “reasonable” investment-backed expectations rather than assuming that property restrictions (or lack thereof) at the time of purchase play no role in shaping expectations.
Regulatory-takings jurisprudence is a quagmire that Florida courts further contort to ensure that state authorities can regulate without the constitutional responsibility to provide just compensation for burdened property. If the Court fails to take this case, it is not just property owners who will suffer. Allowing the state-court ruling to stand—blessing theft of property without compensation—may work directly against the purpose of the regulations; rather than providing effective conservation, lack of compensation may create a race to develop.
Consider the Beyers’ situation: if they had known in 1970 that they would not be able to build their retirement home one day, their best course of action would have been to develop the island to its highest allowable limit. Refusing compensation in cases that clearly fall under the Supreme Court’s total-deprivation-of-use rule will merely provide incentives to investors who want to avoid the risk of total loss to develop as much as possible, as quickly as possible.
The Court will decide whether to take the case of Ganson v. City of Marathon later this fall.
*This is the first brief that Cato research fellow Trevor Burrus has officially signed. He's contributed to more than 100 over the years, but only recently became a member of the bar. Now he can get the public credit he richly deserves.
This study explored why there is so much failure and mismanagement in the federal government. Federal agencies lack incentives for efficiency and quality, and the environment in some workplaces seems to breed unethical behavior. The government has also become far too large to manage effectively and for Congress to oversee adequately.
A new investigation by USA TODAY reveals a pattern of rather disgraceful mismanagement in the Department of Veterans Affairs:
… the VA—the nation’s largest employer of health care workers—has for years concealed mistakes and misdeeds by staff members entrusted with the care of veterans.
In some cases, agency managers do not report troubled practitioners to the National Practitioner Data Bank, making it easier for them to keep working with patients elsewhere. The agency also failed to ensure VA hospitals reported disciplined providers to state licensing boards.
In other cases, veterans’ hospitals signed secret settlement deals with dozens of doctors, nurses and health care workers that included promises to conceal serious mistakes—from inappropriate relationships and breakdowns in supervision to dangerous medical errors–even after forcing them out of the VA.
USA TODAY reviewed hundreds of confidential VA records, including about 230 secret settlement deals never before seen by the public . . . In at least 126 cases, the VA initially found the workers’ mistakes or misdeeds were so serious that they should be fired. In nearly three-quarters of those settlements, the VA agreed to purge negative records from personnel files or give neutral or positive references to prospective employers.
This study on privatization discussed how the “public” sector is often less transparent than the “private” sector. The VA is certainly not transparent:
The secret settlements obtained by USA TODAY represent a fraction of the problem doctors and other employees the VA has discovered over the past 10 years.
Each year, the agency fires hundreds of medical workers and pays out hundreds of malpractice claims.
The providers’ names remain secret. USA TODAY asked to inspect the records for thousands of those cases, but the VA blacked out or would not release the identities of the providers or the details of what took place.
You may think that we have “government of the people, by the people, for the people” in America, but it does not seem that way when federal agencies behave like this.
For more on federal government failure, see here, here, and here.
For ideas on reforming the VA, see here.
President Trump today signed an executive order that urges executive-branch agencies to take steps that could free millions of consumers from ObamaCare’s hidden taxes, bring transparency to that law, and give hundreds of millions of workers greater control over their earnings and health care decisions.
Background: ObamaCare’s Hidden Taxes
Since the Affordable Care Act took full effect in 2014, premiums in the individual market have more than doubled. The average cumulative increase is 105 percent, equivalent to average annual increases of 19 percent. Family premiums have increased 140 percent. In Alabama, Alaska, and Oklahoma, premiums have more than tripled. Analysts predict an average increase of 18 percent for 2018; premium increases will average 24 percent in Washington State and 45 percent in Florida. Maryland Insurance Commissioner Al Redmer predicts that if these trends persist, the Exchanges “will implode.”
ObamaCare’s skyrocketing premiums are not due to rising health care prices. They are due to the hidden taxes ObamaCare imposes. The law’s community-rating price controls increase premiums for the healthy in order to reduce premiums for the sick. The law also requires individuals and small employers to purchase a government-defined set of “essential health benefits,” including coverage (e.g., maternity care) that many consumers do not want.
The cost of ObamaCare’s hidden taxes is substantial. The Department of Health and Human Services commissioned (and then, oddly, suppressed) a study from the consulting firm McKinsey & Co. estimating their impact. McKinsey found ObamaCare’s essential health benefits mandate has increased premiums for 40-year-old males by up to 23 percent over four years. Even more startling, McKinsey found community rating has increased premiums for 40-year-old males by a further 98 percent to 274 percent since 2013. Community rating’s impact on premiums has been three to nine times greater than the overall trend in health care prices and spending. Community rating has also been the driving force behind ObamaCare’s narrow provider networks, which McKinsey found have largely or entirely erased the benefit from requiring consumers to purchase additional coverage.
Finally, insurers are fleeing the Exchanges, leaving consumers with little or no choice of carriers. At last count, 49 percent of counties and 2.7 million Exchange enrollees (29 percent) will have only one carrier in the Exchange. Exchange coverage is also eroding because ObamaCare literally penalizes insurers for providing high-quality coverage to the sick.
Fortunately, Congress explicitly exempted one category of health-insurance products from ObamaCare’s crushing hidden taxes. While those provisions apply to individual health insurance coverage, the Public Health Service Act states, “The term ‘individual health insurance coverage’ means health insurance coverage offered to individuals in the individual market, but does not include short-term limited duration insurance.” Congress did not define “short-term limited duration insurance,” but HHS had traditionally defined them to be health plans with a term of less than 12 months and that were not guaranteed renewable.
After ObamaCare took full effect in 2014, the market for short-term health insurance policies grew by 50 percent as many consumers sought to avoid the law's hidden taxes. In 2016, the Obama administration tried to cut off that escape hatch and force consumers to pay those hidden taxes by prohibiting short-term plans with terms that exceeded three months.
Today’s executive order directs executive-branch agencies to “consider allowing such insurance to cover longer periods and be renewed by the consumer.”
If the Trump administration allows insurers to offer guaranteed renewable short-term plans, it would be truly revolutionary. Consumers could avoid ObamaCare’s hidden taxes and low-quality coverage by purchasing relatively secure insurance that protects them against the long-term financial cost of illness, and that protects them against their premiums rising if they get sick. Premiums would be far lower than they are in the Exchanges. If the administration gets the regulations right, this change could even allow innovations that reduce the cost of health-insurance protection by a further 80 percent. In effect, the Trump administration could enact Sen. Ted Cruz's (R-TX) compromise repeal-and-replace proposal via regulation.
Health Reimbursement Arrangements
The federal tax exclusion for employer-sponsored insurance effectively penalizes workers unless they surrender a sizeable chunk of their income to their employer and let their employer choose their health plan. Workers with family coverage lose control of an average $13,000. Overall, employers get to control $700 billion per year that rightfully belongs to their employees.
Health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs) allow workers to control a portion of their health care dollars without penalty, but different rules apply to each. Only HSAs give workers true ownership of their health care dollars. But HRAs have the potential to allow workers who purchase health insurance on the individual market to avoid the effective tax penalty the federal government has traditionally levied on workers who purchase such coverage.
President Trump’s executive order directs executive-branch agencies “to increase the usability of HRAs, to expand employers' ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup [i.e., individual-market] coverage.” Presumably, this means the administration is thinking of rolling back the Obama administration’s rule that employers could not use HRAs to make tax-free contributions to their employees' individual-market premiums.
If the agencies get the rules right, they could reduce taxes by reducing the penalty the federal government imposes on workers who want to control their health care dollars, and free workers to purchase relatively secure coverage (e.g., on the short-term market) that does not disappear when they change jobs.
Association Health Plans
The federal government imposes different rules on coverage for individuals, small employers, and large employers. It also imposes different rules on employers who purchase coverage from an insurance company versus employers who “self-insure” by bearing that risk and basically running their own insurance company. As a rule, large employers and those that self-insure are subject to less regulation.
Association health plans, or AHPs, are a way for multiple individuals or employers to purchase insurance together. Trump’s executive order directs the Department of Labor to “consider proposing regulations or revising guidance, consistent with law, to expand access to health coverage by allowing more employers to form AHPs.” It appears the goal is to allow AHPs to let groups of small employers qualify as large employers (and therefore become exempt from federal regulations such as ObamaCare’s essential health benefits mandate) and to let them self-insure (and therefore become exempt from state health-insurance regulations).
The AHP changes the executive order envisions would not be as clear a win for consumers. They seek to build on existing government favoritism toward employer-sponsored health insurance, a type of coverage that has the curious feature that it disappears when you get sick and can’t work anymore. Employer-sponsored insurance therefore does not solve but instead exacerbates the problem of preexisting conditions. It also operates under community-rating price controls that are similar to those in ObamaCare, and that produce similar effects. (Oddly, while the Trump administration is trying to free consumers from community rating, it boasts that AHPs would have that feature.) If the AHP-related changes allow employers to avoid ObamaCare’s hidden taxes, that is a step in the right direction. But to the extent they would move even more authority for regulating health insurance from states to the federal government, that would be a step in the wrong direction.
And note: expanding AHPs is not what free-market advocates have in mind when we talk about allowing consumers and employers to purchase insurance across state lines. The idea is to allow employers and individuals to purchase insurance licensed and regulated by a state other than their own, not by the federal government.
Working within the Law, Not Undermining It
Despite all the hype on both sides, Trump’s executive order is not radical, nor would it undermine ObamaCare. Indeed, by itself the executive order does literally nothing. It merely indicates what some in the administration would like executive-branch agencies to do.
The changes this executive order envisions would not, as some suggest, be the most significant changes the Affordable Care Act has seen. All three branches of government have already altered the constraints imposed by the ACA to a greater extent than these changes would.
- Congress and President Obama actually repealed parts of the ACA, including the “1099 tax” and the CLASS Act.
- Congress and President Obama curtailed the law’s tax cuts and subsidies by increasing premium-assistance-tax-credit clawbacks and limiting risk-corridor subsidies.
- In NFIB v. Sebelius, the Supreme Court radically rewrote the ACA by making the Medicaid expansion optional.
- President Obama unilaterally exempted people from the ACA’s health-insurance regulations when he created “grandmothered” plans.
The changes this executive order envisions would not go nearly so far. They would not alter the constraints imposed by the ACA or other federal statutes. They would work within those constraints.
It is therefore not accurate to claim these changes would somehow “undermine" ObamaCare. They would allow many consumers to avoid the Exchanges and ObamaCare’s hidden taxes—but then again, so did President Obama when he created “grandmothered” plans. They would make the costs of community rating, essential health benefits, and other hidden taxes more transparent—but so did “grandmothered” plans, as well as the steps President Obama took with Congress to increase premium-assistance-tax-credit clawbacks and to limit risk-corridor subsidies.
When healthy consumers flee the Exchanges, premiums could rise even faster than they already are, and the Exchanges could indeed collapse as Maryland’s insurance commissioner predicts. If so, we must understand that as a manifestation of ObamaCare’s unpopularity. If community rating and other provisions of the law were as popular as ObamaCare supporters claim, consumers would be lining up to pay the resulting hidden taxes. But they won’t--and even Democrats know it. So when Democrats object to reforms that would let consumers avoid ObamaCare’s hidden taxes, they are actually implicitly conceding that even the ObamaCare provisions that they claim are popular are actually unpopular. What Democrats appear to mean when they complain this executive order “undermines the law” is that it could undermine their illusions about ObamaCare’s popularity and sustainability.