Thursday, March 27, 2008

Obama's Tax Expectations

GREG MANKIW MAKES an interesting observation with respect to Senator Obama's choice not to make use of tax-deferred savings opportunities:
I was surprised to see that Senator Obama has, for some reason, decided not to use this opportunity. His recently released tax returns show significant Schedule C income from book royalties (about half a million dollars in the most recent year). I am not a tax accountant, but I believe he could have put a substantial part of these earnings ($44,000) into a SEP-IRA and deferred taxes on it until withdrawal. Line 28 on his tax return, however, is completely blank.

Why? I don't know. Maybe he is getting bad tax advice. Or maybe he is expecting vastly higher tax rates in the future when the accumulated savings will need to be withdrawn and taxed. As Obama economic adviser Austan Goolsbee has written, "Future increases in tax rates potentially threaten to significantly reduce the value of your retirement savings and may even mean that you should not save in 401(k) accounts at all."
Well, this is a very interesting possibility, especially since I don't think there is a clear reason to think Senator Obama would not want to hire sound tax advice. Maybe, the Senator is looking at the financial and political future of Social Security and Medicare, or maybe he is simply expecting the democrat party to be in control of the power to tax in the future.

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