For the bulk of large 401k contributors, this is a "nothing-burger", as they say these days.
Biden would instead “equalize” the incentive system by ending such deductions and replacing them with flat tax credits for each dollar saved. The campaign isn’t saying what that percentage would be, but the Urban-Brookings Tax Policy Center has estimated a 26 percent credit would be roughly revenue neutral over the first 20 years and beyond, which the Biden campaign is aiming for.
This means that if you're in the 22% or 24% tax brackets(a majority of people who are making decent-sized contributions to 401k's), it's a tiny net plus for you. If you're in the 10%/12% bracket, it's a larger plus - but with the exception of highly-frugal individuals toward the top of the 12% bracket, most people in the 10/12% brackets aren't maxing out their 401k's.
i.e. if your income is below $163k(single) or $326k(family) you'll get a larger tax deduction. If your income is above that you'll get a smaller deduction/have to pay more taxes. 163k/326k income is 95th-97th percentile in this country, so it's negatively affecting a very small slice of the population who are doing quite well already.
I completely agree with your assessment -- that's how I viewed it after reading the Forbes article. It has some minor tweaks around the edges, but isn't really that big of an impact for the vast majority of taxpayers. It seems like the intent is to allow for a bigger benefit for low-income folks... Sounds like that could be accomplished a whole lot easier by making the "Savers Credit" a bit more generous, potentially.
A 25% credit would not be a bigger benefit for lower income folks eligible for EITC. The EITC phaseout rate is 21%. My state matches EITC at 30%, so 30% of 21% is an extra 6.3%. Thus 21% + 6.3% = 27.3% > 25% before considering any federal or state tax deductions. State tax for us is 5+%, so we are now up past 32%. Our federal bracket is 12%, but a number of nonrefundable credits more than wipe out any federal taxes (60% of AOTC, $600 of < 17 CTC, $500 > 17 CTC, $2k RSC) so we won't add any federal rate to the tally.
Now, would this proposed credit be fully refundable like EITC, or nonrefundable like the nearly useless retirement Saver's credit? RSC is designed so that it cannot be effectively used - at AGI low enough to be eligible for the max credit, tax owed is zero or lower than the credit. At an AGI where tax owed = max credit, AGI is no longer low enough to be eligible for max credit so tax is owed.
Then there's the outside things that rely on using the taxable income deductions, like FAFSA and ACA. Reducing our AGI thru payroll retirement contributions can make us eligible for either the Simplified Needs Test (ignores asset reporting, reducing EFC), or the auto EFC = 0. The ACA is more straightforward - lower AGI = greater subsidies, AGI too high and you are ineligible for any subsidies at all.
I'm very sensitive to the drawbacks of the current employer controlled 401k system - until a year ago I had no access to any employer plan whatsoever. Now I have a SIMPLE IRA, and I'm maxing it out to attempt to get a bit more of a balance between tax deferred $ in my name vs DH's name (to that point, we'd saved everything traditional in his employer accounts as our only choice; we also have Roth IRAs in both names). Whose name is on the account is important due to a state tax quirk - we each get a $20k annual tax free withdrawal from retirement accounts, but it's not combinable - no traditional $ for me to withdraw, no $20k tax free withdrawal, cutting our total tax break in half.
That $20k or 20% limit would mean I couldn't max anymore, 20% cuts me down to $4k. That percentage limit HURTS lower income workers more.
I like the idea of increasing IRA contribution limits and putting retirement accounts in the control of individuals instead of employers, except for one detail: IRAs and employer plans are treated differently on the 1040. Employer plan deferrals reduce both w2 wages AND AGI (important for EITC calculation - EITC is tested on BOTH). IRA contributions only reduce AGI, and are thus useless for increasing EITC.
If these rules had been in place for last year's taxes, we'd have lost $4300 in refundable credits (assuming best case scenario: the new credit is refundable and would offset the extra state tax on lost deductions, else a loss of an extra $1500), and we'd have been limited to $16k less in retirement contributions (neither of us maxed last year, but the 20% limit still would cut our actual amount nearly in half).
All around, it's lose-lose-lose for lower income earners.