Okay, yes this title isn’t a preferred route for the government to take, but there is a good chance a small decrease in 401(k) limits would help both the government and the economy.

Currently in 2012, the cap for the 401(k) contributions is set to $17,000.  But what if we reduce the contribution limit down to $15,500?

Such a decrease in the contribution limit would mean that those (like me) that were contributing that extra $1,500 would be a direct impact on tax collection for the government and there is a good chance it would help business too.  With respect to business, it would help because when people get that little extra money per pay period they most likely would spend that money.  After all it’s only about $30 if you are paid weekly ($60 if you are paid biweekly).  It might not seem like a lot, but it would give business a big boost really.  Actually the $30 and $60 figures would need to have taxes taken out of the amount received, so it would be less that those figures, but for simplicity I’m going to keep it as I state above.

And the government would be the biggest boost of all.  Most of the people who are contributing that extra $1,500 are in the 25% or 28% tax bracket.  Most of us will be millionaires some day (or so I hope).  So if we go with the lower percentage bracket (25%), that would mean that the government would get an injection of $375 extra per year per person.  So if there were just a mere million that were in the $1,500 camp, that would mean that the government would receive an extra 375 million injected into the economy.

Now that just a mere $1,500 decrease in the contributions limit.  If the reduction was more, the impact would be greater…  The problem is that the government would also increase their spending too.  They wouldn’t keep their spending in check, and this would mean that in about 5 to 10 years, we would be back in the same condition that we are currently in.

So even though it seems like a good solution to fix some of our problems from a mathematical sense, we would be in the same position in a few short years.  Change need to be in the way that government runs, not in the amount of taxes that they receive.

What are your thoughts on the matter and the idea of reducing the 401(k) contribution limit?  I know personally I’m not in favor of it, even if it would help.  I would rather the government cut out some of their more wasteful programs, but this is an option that should be considered.

Bests,
MR