I did a quick spreadsheet that tries to compare the costs and benefits of a regular brokerage account and a 401(k). I assume that the 401(k) investor invests $100, whereas the brokerage investor puts away $70 (the after tax amount, assuming a marginal tax rate of 30%).
I grow the 401(k) money by 6% for 10 years (to $179), then collect all the taxes, leaving $125 when the money is withdrawn. The government gets $54 in taxes.
I grow the brokerage money by 4.8%, which is the after-tax equivalent of 6% return, assuming a capital gains rate of 20%. At the end, the after-tax investor has $119, and the government has collected $40 in taxes (the initial $30, plus 1.2% of the growth each year.
So, the government gets MORE from the 401(k) investor than from the brokerage investor ($54 vs. $40). Sure, the money comes at the end, but in the steady state, with many people investing and retiring, that should wash out.
That analysis ignores the fact that capital gains taxes can be deferred as well. For example, if you invested in Apple stock in 1985, you still wouldn't pay taxes on the growth, unless you sell it.
I guess I still don't understand the argument that 401(k) is a net cost to the government, at least when it comes to high income retirees.
Source: http://boards.straightdope.com/sdmb/showthread.php?t=673867
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