Capitol Monitor ....
Congressman J. Randy Forbes, Fourth District of Virginia 

March 19, 2004

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In this Issue

1. Point of View: Foreign Law - Coming to a Court Near You

2.  Q&A - Getting the Most From Your Savings

 

 

::  Point of View  ::

Flanked on either side of the entrance to the Rotunda of the United States Capitol are the statues of two great Virginians: Thomas Jefferson and George Washington. Every day I walk by them on my way to the floor of the House of Representatives.

As I walk past Jefferson and Washington on my way to vote, I am reminded of the sacrifices our early founding fathers made to make America great and the wisdom upon which they built our nation. I am reminded that they cautioned us – they cautioned me – to guard against those that would seek to undermine the principles upon which our nation was founded. This week as I passed the statues of Jefferson and Washington, I could not look them in the eye. 

On my mind has been a problem silently brewing below the radar screen of most Americans. With growing frequency, the Supreme Court of our country is quietly undermining the sovereignty of our nation. Our Court is turning beyond our borders, and beyond the laws of our land, to decisions of foreign judicial tribunals when deciding American constitutional and statutory cases. Six of the nine Supreme Court justices have written or joined opinions that cited foreign authorities to justify their decisions. Lower Federal courts are beginning to follow this disturbing trend. 

Article VI of the Constitution clearly states that the Constitution and federal statutes are the supreme law of the land. As a Member of Congress I swore an oath to defend the Constitution and pass laws that respect it; each of our Supreme Court justices also raised their right hand and swore an oath to defend the Constitution and interpret the law in a manner that preserves it. 

In a case focusing on allowable delays of execution (Knight vs. Florida) Supreme Court Justice Stephen Breyer said he found “useful” court decisions on the matter in India, Jamaica, and Zimbabwe.

Will he also find useful Zimbabwe law when interpreting the First Amendment? Last month Zimbabwe's highest court upheld a law requiring all journalists to be licensed by the government or face criminal charges. The law says that any journalist who works without a license from the state-appointed Media and Information Commission can be prosecuted, and may face up to two years in prison if found guilty. Dozens of journalists have been prosecuted under the Act, which has also been used to prevent publication of Zimbabwe's only major independent daily newspaper, The Daily News.

If the Supreme Court of the United States is insistent on citing foreign laws to justify their activist opinions, at the very least, they ought to tell us which foreign laws they like and which ones they don’t like. Do we adopt the law of countries hostile to the U.S.? Do we adopt only the laws of our friends? What about those friendly today and hostile tomorrow? 

What will be next? Will the Supreme Court look to the Netherlands when deciding our drug laws? In Saudi Arabia laws on marriage say a man is legally entitled to up to four wives. Will our justices be influenced by those laws? If not, why not? 

The constitutions of India, Jamaica, Germany, and France are younger than I am. The Constitution of Zimbabwe is younger than my son. Why would we look to the laws of other countries when our Constitution is the longest working constitution in the world? Our Constitution was adopted by our founding fathers, defended by our mothers and fathers, and protected today by our sons and daughters. Our Constitution is interpreted and given life by our legislatures and judges either appointed or elected by citizens of our country based on the laws of our country. Throughout 200 years, it has withstood civil war, world war, natural disaster, and political turmoil. It is the fortress that protects the freedoms that we all too often take for granted. 

I have joined with Congressman Bob Goodlatte and Congressman Tom Feeney to cosponsor the Reaffirmation of American Independence Resolution. This bill expresses the outrage of the American people at being made subject to the laws of foreign countries – countries where laws are not made through elected representatives of the American people, let alone even crafted through a democratic process. The resolution will reaffirm what our founding fathers made clear: the laws of dictators and tyrants will not govern America. With its passage, this resolution will reaffirm our nation’s dedication to our sovereignty, to our people, and to the principles upon which we were founded.


:: Q&A-Getting the Most From Your Savings ::

This year marks the thirtieth anniversary of Individual Retirement Accounts. While IRAs have provided welcome relief from the tax bite that the government places on saving, they are beginning to show their age. IRAs have become increasingly complicated; there are now two different IRAs with different tax treatments, contribution limits, and withdrawal rules, as well as a plethora of other tax-preferred savings accounts to encourage saving for medical care and education. IRAs add to the complexity of saving, even as they ease the tax burden imposed upon it.

President Bush recently proposed the establishment of Lifetime Saving Accounts (LSAs) and Retirement Saving Accounts (RSAs) to simplify and improve the current system of tax-preferred accounts, and Congress may take up legislation in the near future. 

How is saving typically taxed?

Saving is typically subject to two layers of tax. For instance, a worker who saves part of her paycheck is taxed on that money as soon as it is earned. When the worker then saves a portion of her after-tax earnings, the resulting income is also taxed. The result is a heavy tax burden on saving.

How do IRAs change the taxation of saving?

IRAs are special tax-preferred saving accounts that eliminate a layer of tax on saving. As opposed to the standard two-layer saving tax, income put aside for retirement in an IRA is taxed only once – either when it is earned, or when it is withdrawn from the account.

What’s the difference between a Roth IRA and traditional IRA?

The difference between Roth and traditional IRAs lies in when the tax benefit is conferred. A traditional IRA offers tax relief when an individual makes a contribution, while a Roth IRA provides relief when the individual makes a withdrawal. Taxpayers who save in a traditional IRA do not have to pay income taxes on earnings contributed to an IRA; however, taxes are due when the contributions and any investment earnings are withdrawn. Individuals using a Roth IRA, on the other hand, owe the usual income taxes on all earnings contributed to the Roth account but avoid any future taxation of income earned in the Roth account.

Which type of IRA offers more tax relief for saving?

It depends. Someone facing the same tax rate at the time of contribution and withdrawal should in theory obtain the same tax relief under Roth and traditional IRAs. However, if that person expects higher tax rates at the time of withdrawal than the time of contribution (either because of a higher income or because Congress raises tax rates), the up-front tax payment of the Roth IRA would be a better deal. Conversely, a lower tax rate at retirement would make deferring taxes until withdrawal – the traditional IRA treatment – the more attractive option. Unfortunately, this simple comparison of Roth and traditional IRAs is obscured – especially for middle- and lower-income taxpayers – by the interaction of traditional IRAs with Social Security and other tax system features. In particular, withdrawals from a traditional IRA count as income that could increase the tax owed on Social Security benefits. Also, deductions received for contributions to a traditional IRA could lower an individual’s tax bracket, reducing the value of other deductions such as the mortgage interest deduction.

Roth IRAs, on the other hand, are not subject to any of the ambiguities plaguing traditional IRAs. For this reason, most taxpayers – especially middle- and lower-income individuals – receive a larger tax benefit from Roth IRAs than from traditional IRAs.

Are there restrictions on who can invest in an IRA?

Yes. Eligibility rules depend on a variety of factors, including age, income, tax filing status, and the type of IRA in question. Traditional IRAs are generally more restricted than Roth IRAs. In 2004, married taxpayers under age 70½ who earn less than $60,000 may contribute up to $3,000 to a traditional IRA. (The income limit is higher if one or both spouses do not have access to an employer plan like a 401(k).) Income limits for Roth IRAs are higher, so couples with incomes up to $150,000 could contribute up to $3,000 to a Roth without regard to age. The annual maximum contribution to an IRA is scheduled to increase to $5,000 by 2008.

Are there restrictions on withdrawals from an IRA?

Yes. Investors generally cannot take withdrawals from either Roth or traditional IRAs until they reach age 59½. There are some exceptions – withdrawals for certain medical expenses, first-time homebuyer expenses, some higher-education expenses, and health-insurance expenses of unemployed individuals are permitted – but otherwise early withdrawals are hit with a 10% penalty. Investors in traditional IRAs, but not Roth IRAs, face a second restriction: they are required to begin withdrawals (also called “distributions”) from their IRA, and to begin paying taxes on those withdrawals by age 70½.

What are the downsides of restrictions on IRAs?

Both participation and withdrawal restrictions add to complexity and discourage workers from saving in IRAs. Paradoxically, income restrictions on IRA participation can mean lower saving at all income levels, as potential savers may be uncertain whether they are eligible to use an IRA. Also, financial institutions that market IRAs may find the marketing effort less worthwhile when IRAs are not an option for many potential investors. Income limits on IRAs thus mean lower participation rates at all income levels – a result observed when income limits were first imposed in 1986.

The various withdrawal restrictions associated with IRAs also discourage IRA participation. Required withdrawals from traditional IRAs at age 70½ could make IRAs costly for some seniors by forcing them to sell assets before they need the money – and sometimes forcing them to sell at a loss. Also, the minimum withdrawal age for both types of IRA makes these saving vehicles a risky bet for some people, especially low-income workers, who could need access to their savings prior to retirement.

What is the difference between an IRA and a 401(k) plan?

A 401(k) plan is a employer-sponsored savings account that provides tax relief similar to that offered by a traditional IRA. The primary difference between the two is that the 401(k) can only be administered by an employer and is only available to workers whose employers choose to offer one. Access to an IRAs, on the other hand, does not depend on employer participation.

What other tax-preferred saving vehicles exist?

Congress has created a variety of other tax-preferred saving incentives that are similar to IRAs. In addition to employer-based retirement savings accounts like 401(k)s, there are tax-preferred accounts for dependent care and educational expenses, as well as several types of accounts for medical expenses. These accounts typically resemble a traditional IRA, which provides an immediate tax deduction for contributions.

How would the proposed RSA and LSA accounts affect IRAs and saving behavior?

The president proposed simplifying the system of tax-preferred savings accounts by consolidating existing accounts and easing rules governing how saving in these accounts may be used. Congress is currently considering the specifics of such a program, though no formal legislation currently exists. Lifetime Savings Accounts (LSAs) would have the tax treatment of Roth IRAs but would allow withdrawals at any time and for any reason. LSAs would likely encourage saving by attracting workers who are reluctant to tie up their money until retirement and who are deterred by the complexity of existing saving options.

Retirement Savings Accounts (RSAs) would be modeled on current Roth IRAs and would replace both Roth and traditional IRAs for tax-preferred retirement saving. Unlike current IRAs, RSAs would have no income limits, no age limits, and no age at which withdrawals are required. Withdrawals from RSAs would be permitted beginning at age 58. RSAs would also likely encourage more workers to save by eliminating confusing saving options and complex rules associated with traditional IRAs and by removing income limits that discourage widespread marketing of IRAs by financial institutions.

YOUR BOTTOM LINE ....

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ON THE HILL ....

Current Floor Proceedings

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IN YOUR TOWN ....

March 25:
Brunswick Office Hours

March 26:
Chesterfield Office Hours

March 26:
Powhatan Office Hours

April 2:
Isle of Wight Office Hours

April 2:
Suffolk Office Hours

OFFICE LOCATIONS ....

307 Cannon House Office Building
Washington, DC 20515
202.225.6365

505 INDEPENDENCE PKWY, SUITE 104
Chesapeake, VA 23322
757.382.0080

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Colonial Heights, VA 23834
804.526.4969

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Emporia, VA 23847
434.634.5575

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