Last year, the Wall Street Journal Reported:

...there is a precedent when it comes to taxing those who have saved what lawmakers think of as "excessive." From 1987 to 1997 they imposed a 15% excise tax on annual retirement-plan distributions over $150,000. The tax applied even if other rules forced the account holder to withdraw more than $150,000, and it could hit retirement assets in estates as well.

Does this really surprise anybody? Politicians created the high tax environments of the 1970s, which saw the highest marginal tax rate tipping 70 percent in 1970. This 70 percent tax bracket was adjusted slightly downward in 1981 and in 1982 it was cut by 20 percent. Even the bottom tax bracket was 14 percent up to the first $1,000 of income.

The "Solution"

The "solution" to the high tax rates wasn't to dramatically lower taxes during the 70s. Instead, congress created retirement plans. Retirement plans shielded individuals from current income tax if they were putting money away for their personal retirement.

Congress engineered these plans so that laws could be changed at any time and, not surprisingly, the laws have changed over time. Had congress wanted to encourage savings, it would have just reduced the income tax rates dramatically. Sure, they eventually did that, but not after many people "bought into" the idea of a retirement account.

The Problem

The problem with the "solution" of retirement accounts is that encourages people to act in ways they wouldn't normally act. It creates a massive mis-allocation of funds in the financial markets (into mutual funds).

This wouldn't happen naturally. With the introduction of the Employee Retirement Income Security Act (ERISA), mutual funds were given the foothold necessary to become the de facto staple investment for 401(k)s, IRAs and many other retirement accounts. Mutual funds are not appropriate investments for many people, yet this is often what's available in 401(k) plans, which means that's what people invest in.

There's nothing inherently bad about pooling funds together, but many people simply don't understand the inner workings of the fund. They're a more complex investment than, say, individual stocks.

Instead of creating more laws, government should eliminate ERISA qualified retirement plans like 401(k) plans, and cut tax rates for all savings to zero. Cutting taxes for savings is just a start, mind you, but an important one. Don't penalize thrift, and don't turn it into some kind of twisted game.

Let the free market decide where money should be invested.

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