Via Glenn, comes the dumbest thing I’ve read in a while — and I’m paid to read dumb things all day long. Anyway, here’s one of the many reasons the economically-illiterate Gerald E. Scorse wants to eliminate Roth IRAs:
Then, too, Roths could be a drag on the U.S. economy. Since no withdrawals are required, assets can lie idle indefinitely.
For the last time, I want the idiot Keynesians to sit down, shut up and listen: You don’t get rich by spending money. Savings generate the investments necessary for wealth creation. And Roth IRAs encourage lots and lots of savings.
As for this “idle” business, it simply isn’t so. When a financial institution holds your savings, it does not stuff the money under a mattress and wait for you to come ask for some of it back. No, the bank loans the money out to people who will, it is hoped, use it for a little wealth creation. That ain’t idle.
And the loans aren’t made at some cheap dollar-for-dollar rate, either. To keep the math simple, let’s say a bank’s legal capitalization requirement is ten percent. That means, for every dollar you park in savings, the bank can lend ten. Nine dollars for wealth creation, created out of thin air. If you have a million bucks in your IRA — you wise devil — that’s ten million dollars for people to buy homes or start new businesses.
That’s your “multiplier effect,” right there. Washington doesn’t have one — you do.
Now let’s look at things from the other side. Every dollar you take out of savings does get spent and stimulate the economy — sure, yeah, great. But every dollar you take out of savings also sucks out nine dollars from the pool of capital available for wealth creation. Spend a million, and nine million dollars simply vanish.
But modern statists such as Scorse and the execrable Paul Krugman would rather get Washington’s filthy hands on your dollars because, well, they’re statists. That’s what they do.
Do you know of any Roth IRAs that are held in the form of cash deposits? Me neither. They’re in the bizarre World of Wall Street, the place the government more or less forces us to keep our money if we want special tax treatment. Now, granted, quite a bit of this money would wind up there anyway, but hopefully it occurs to people that forcing people to invest about $10 trillion dollars through a fairly specific mechanism (Wall Street brokerage houses) may create something called a “bubble.”
It’s just like the government encouraging buyers and lenders to stick money into housing. Sure, some of us would have done so anyway, but we wound up with a grossly distorted and inflated market that eventually reached a crisis because nobody knew what the true value of anything was anymore.
Back to IRAs (and 401ks) – Wall Street’s various investment firms get huge piles of money to play with (and suck fees out of), and the value of publicly-traded investments are significantly distorted so Fortune 500 companies get nicely inflated equity values. Anyone want to guess when this pile o’ fun will come crashing down?
So you could make the argument for getting rid of all investments with special tax privileges, as well as the mortgage interest tax deduction,etc. and move towards a flatter, simpler model that makes it more difficult to pit citizen against citizen when it comes to who “wins” and “loses” when taxes are raised and lowered.
The point is, we shouldn’t be taxing savings and investment at all.
You’re absolutely, 100% correct, but if we are going to go down that road then it should be in the manner that makes the fewest market distortions. Instead we have a situation where all of the little piggies compete for spots at the tax break trough, and lots of behavior modification policy from our wise overlords to “manage things.” Coincidentally, much of the “suggested” behavior favors big campaign contributors. Shocking!
Isn’t the income taxed before it’s put in a Roth IRA? Gerald E. Scorse’s complaint is that Roth IRA savings aren’t taxed when spent after retirement age as opposed to 401K’s.
Since someone is going to come around and probably tell the story of the $20 bill and the unused hotel room, I’ll point out:
Yeah, it is more complicated than that, but it’s more complicated than the story, too.
Every dollar you spend does do some real good, and it can trigger more, but it requires that more people choose to spend that dollar they get as well. Given that almost everyone has debts, part of that dollar is going to go to debts at each point, and it’s a real mess to measure what’s what.
All of this ignoring that gov’t is an incredibly bad way to do almost anything– “inefficient” doesn’t even come close, since a lot of the time they’re not even headed for the same endpoint that you’re measuring efficiency against.
I was always under the impression — and for most of my life it’s certainly been true — that when I apply a part of my earnings to debt reduction, I’m freeing up the lender’s reserves for other people to borrow and consume.
No one in their right mind who receives money is going to stow it away and not find a way to make it useful, if there’s something it can be doing for them. I don’t have the option of storing cash in my mattress; the credit card company or the mortgage lender are business that need cash flow to make a profit and pay their employees. People who make a profit on their business ventures or investments need to send money out as fast as it comes in, or else put it up with some other business that depends on cash flow to make its profits and pay its employees.
The idea that large numbers of can simply lie fallow in an undistorted market, is simply ridiculous. And if they can do so in the current market, the question then becomes why is the market distorted and how do we fix that, not “how do we get all those dollars people aren’t spending spent in an economy defined by uncertainty?
Before you look at my “get rid of IRAs and 401(k)s” argument because you’re thinking “well, where else would I stick my money?” look at the one, huge sector that this helps to starve for capital. The sector that generates most of the job growth in this country. That’s right, the government’s investment rules greatly favor investing in big business and explicitly deny investments in small business.
What we’ve wound up with is a situation where only the exceptionally rich (people who have so much excess money that they’re no longer worried about IRA or 401(k) investment rules) – essentially, “angel investors” – and banks will lend to small business. Most banks will only do SBA-guaranteed loans (and even those are extremely tough these days). Angel investors generally look for things with huge potential payoffs; there’s a lot of competition for those dollars so they wind up in the exotic areas du jour like biotechnology (10 years ago it was the dot-coms, etc.).
So the only way you can now start a small (or, these days, grow) business is if you (and, your investors, if you can find any) are willing to take a major effective tax penalty on top of your normal risk of losing your capital. And then we wonder why unemployment stays high… a lot of it is because Washington “tells” us (via tax policy) to keep our money in the big, ossified institutions that don’t generate as much growth or as many jobs, but do tend to send bags of money to politicians.
Actually, “explicitly deny” were the wrong word (stupid Monday mornings; must still have too much vodka in my system – or maybe not enough). I meant they deny special tax treatment. Although there has been talk about legislation to prevent anyone other than people with large piles of cash from investing in small business.
This is why we should have a consumption based tax system rather than a wealth generating tax system. Say, a 5% tax on goods & services, excluding food, clothing, primary residential real estate and medical care.
A year or two ago, there were Congressional hearings on the idea that people are just too stupid to make good retirement investment decisions for themselves. The “enlightened ones” proposed having the government take over IRAs and 401Ks (several trillion dollars of investments) and offer lifetime annuities instead. In effect, they were going to seize trillions of dollars that millions of people have managed to put away and replace it with a promise of future payouts from the government. The author being cited is most likely from this group advocating wealth confiscation.
You know as well as I do that if this idea passes, government will blow though those trillions of dollars in no time passing new entitlement programs to buy more votes. Because not everyone has IRAs or 401Ks, it would be “unfair” to only offer annunities to those people who actually saved for their retirement, so they’d use this as yet another wealth transfer program to buy more votes.
Words mean things and have consequences. Should Congress seriously try to implement this massive wealth theft, I predict we’ll see politicians, bureaucrats and “enlightened ones” swinging from lampposts across the country. I’ll bring some rope.
I understand your reasoning, but it doesn’t apply to Roth IRAs. The multiplier effect happens w/ bank accounts, but a Roth IRA isn’t a bank account. Rather, it’s a pot of assets held in trust and typically invested in some sort of mutual fund or money market. The upshot is that most Roth IRA assets will be equity investments, rather than a bank account. There is social good from equity investing, of course, but it’s not going to produce the same multiplier effect that a bank account will.
Not true; Roth IRAs can be through investment firms, but they are also offered through banks.
Copied directly from the BofA site, which I’d link if they didn’t redirect all links to ask what state you’re in:
Your Account Options – Roth IRA
Now that you’ve decided to open an IRA, how would you like to invest? Bank IRAs and Brokerage IRAs offer different investment options.
Equity investments do have a multiplier effect — just not the same one as banks.
Seriously, what do you think happens to money that is invested in a mutual fund?
The REAL point here is that ALL Government Promises come with an expiration date. Not just Odumbo’s.
This is the first of many retrenchments as they grasp, as a drowning man, for more and more of your assets. And, like that drowning man, they are panicking (sp?).