Uncle Gary's Bedtime Story: ‘Why Congress Invented Tax-Deferred IRA Accounts'
I hope you're tucked in. Get used to the feeling of being tucked in. Don't you feel safer now? Settle down. I'll tell you a story.
Once upon a time, there were two United States Senators. One was a Democrat. The other was a Republican.
They were very concerned. The government's deficit was up again this year. Of course, it was always up again, every year. But this was becoming a problem. It was making it harder to borrow money. Creditors wanted evidence that the government could pay its bills without facing the nasty trolls called bond vigilantes.
They had to find ways to bring in more revenues.
B. We've got to get more money out of them. Any ideas?
A. We can give them a tax deduction each year to invest money for their old age.
B. Why would that get more money out of them?
A. We'll tell them they can defer paying any income tax on the profits until age 70.
B. But then we can't get their money.
A. Sure we can. We'll borrow against it. We'll use their future tax payments as collateral.
B. You mean the old “full faith & credit of the United States” routine?
A. You've got it.
B. Then what?
A. We'll raise the tax rates later. We'll tell them it's necessary for debt reduction.
B. But we never reduce the debt.
A. Of course not. But the suckers always go for it. They'll pay more taxes “just this once.”
B. So we can borrow even more.
A. Right.
B. But they may start hiding their profits. Money will get hard to collect.
A. That's the beauty of giving a tax deduction now. We will tell them they have to report whatever they invest in every year until they cash out.
B. So, they can't hide it.
A. Right.
B. I am beginning to understand this. How about this? We can tell them their money has to go into government-approved investments.
A. You're right. The investments must be Wall Street approved. We'll go to the Wall Street political action committees and ask for some advance money.
B. But can it really work? Won't the rubes know the taxes must be paid eventually?
A. That doesn't matter.
B. Why not?
A. Because they are present-oriented. They want their free marshmallow now. They will ignore that they can never get out without paying a tax.
B. You mean they will regard the money as theirs, tax-free, as long as they don't take it out, even when it's ours?
A. Yes.
B. You mean they will regard it as tax-free money forever?
A. Yes.
B. But why?
A. Because present-oriented people care nothing about the future. They care only about today. They will let us control what they do with their assets, because they don't want to pay the tax.
B. But they know they must pay the taxes at some point.
A. In theory, they will know this. Emotionally, they will ignore it. These people are like children. They really will let us have control of their money if they think they must pay us what they owe today instead of later.
B. In other words, once in the trap, they will never do anything to get out.
A. That's exactly right. We can leave the door wide open. All we need is a sign. “To get out, you must pay the tax, plus a 10% penalty.” They will not get out.
B. I see another angle. When the government gets in a jam over the debt, Congress and the President can declare a national emergency. We will force the management firms to hand over the assets under their management in exchange for government-guaranteed retirement bonds.
A. Yes, we could. But what could the government do with all those confiscated stocks and bonds? It could not sell them. That would collapse their price.
B. We can do this before prices collapse. Then we can sell the stocks and bonds in our personal accounts. No one with government-approved retirement fund money will be able to do this.
A. I've got it. Johnny Cochran would put it this way: “The market will hold until we unload.”
B. That doesn't rhyme well, but it does sound like Cochran.
A. Then we can tell the Federal Reserve to inflate. We can use the new money to pay off the retirement bonds. The money won't be worth much, but dollars are great for paying off fixed-interest rate bonds.
B. So, that eliminates the federal debt. We can start over.
A. But they probably won't go into tax-deferred retirement accounts again.
B. We'll think of something. We always do.
Now it's time for you to go to sleep . . . like 90% of the electorate.
Sweet dreams.
