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Tax Reform and Gender Equality By Stephen J. Butler

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My niece lived with us for a while back in the early '90's just after she graduated from college. At that time, the job market was dismal even for young people with college degrees. Lizzie and her female friends worked at temporary jobs and quickly immersed themselves in the job market at the lowest rungs of the ladder.

Job-hunting for their male counterparts was dramatically different. The guys played basketball most of the day while waiting for the "perfect job" to present itself. These guys probably wound up working for the women who got a year's head start in the work force.

I thought about my niece while reading the news recently that Abigail Johnson was promoted to head the fund-management operation of giant Fidelity Investments, making her heir apparent to run the entire company. The size and influence of Boston-based Fidelity (the biggest mutual fund company in the country, with more than $900 billion in assets) makes the 39-year-old Ms. Johnson arguably the most powerful woman in America. Granted, she comes from the right gene pool - her grandfather founded Fidelity and her father, Edward Johnson, is currently chief executive. However, she has continuously proven her ability and acumen while rising through the ranks from analyst to fund manager to corporate executive.

With other women breaking the "glass ceiling" throughout Corporate America, such as Carly Fiorina at Hewlett Packard, more women are running businesses and becoming senior decision-makers. While our society still hasn't achieved genuine gender equality, there's no question that recent years have seen significant progress.

The financial services industry is a good example. It has a sizeable representation of women who have the capacity to remain focused and meticulous. Men can focus for a while, but then they start thinking about baseball or golf and whether or not this has really been the right career move after all. (If you've seen the movie "Boiler Room," which takes place in a scruffy stock brokerage firm, you know the kind of male behavior I'm talking about.)

The person who tops a firm's organizational chart, male or female, has an immense impact on how everyone in an organization works, thinks and behaves. Yes, the staggering salary levels of these top people seem surreal. Can any single individual really be worth that much?

I mentioned this to a friend who sits on the board of several public companies and has been involved in hiring several famous CEOs (in one case the notorious "Chainsaw Dunlap" at Scott Paper.) He replied, "The person at the very top has an enormous impact on the entire organization. In most cases, people don't realize or appreciate to what degree the choice of CEO has on their lives."

Assuming this is true, what does it mean to have an increasing number of women running Fidelity, HP and other large companies? Presumably, women in the work force will have more role models and an even greater incentive to excel. Just knowing that a woman is running the company next door can make a difference in someone's attitude towards work. It may inspire women with little or no work experience to seek employment and develop their abilities and skills in a new career.

That brings us to a little-publicized feature of the tax bill just passed by Congress. Spouses who make less than $40,000 will be able to contribute all of their income into a 401(k) plan. A second income of $35,000, for example, could be entirely tax deferred as a contribution to the family's retirement nest egg. The new bill offers many provisions that will have an enormous positive impact on the expanded use of retirement plans.

Until now, the maximum has been the lesser of $10,500 or 25% of annual income per year. Many mismanaged plans have arbitrarily capped the maximum at only 15% per year. As a consequence, women entering the work force and earning additional family income over and above what their husbands are bringing in have been taxed at punitive rates -- over fifty percent in most cases.

Remember, when a spouse goes to work, he or she generates "additional" income over and above the income on which the family already pays taxes. This extra income will be taxed at the highest state and Federal income tax rates applicable. Social Security and Medicare deductions add almost 10% more, which brings the total tax to over 50%. When you add commuting, clothing, lunches, and other non-deductible costs of joining the workforce, you have to ask yourself, "Why bother?" People who "do" bother need the 35% to 40% of gross income that survives after all these taxes and costs.

That's why the new tax legislation is so important. In the future, many working women will be able to put all or most of their earned income into a retirement plan and defer taxes until years later. The investment earnings on this money will be compounding tax-free until future distributions from the plan are used to provide retirement income.

Does it all add up to real money? Definitely. Let's look at a second working spouse who chooses to deposit the first $15,000 of their job income into the plan. The new tax break effectively doubles the value of the first $15,000 of income. In a 50% tax environment, the same individual would otherwise have to make $30,000 in order to take home $15,000 after taxes to add to a savings account. In contrast, once the cash is socked away in a retirement plan, the money compounds tax-free. Depending on the number of years to retirement, this can easily double the hypothetical $30,000 of annual equivalent earnings.

Saving for children's college tuition instead of retirement? There's more good news. You can borrow from your account without triggering a taxable event -- the maximum amount is the lesser of half the account or $50,000. Paying the loan back with interest into your account preserves the money for retirement later. Meanwhile, in just five years, assuming that the assets compound at 10% and with $15,000 annual contributions, the average participant will have accumulated $100,000.

We often underestimate the pervasive impact of tax regulations on social progress. For too long, our tax laws have been economic barriers that penalized women for going to work. The new tax laws, combined with the growing numbers of women in senior positions in Corporate America, have opened windows of opportunity that offer more substantial wealth and security for everyone in our society.

Of course, there are still places like San Francisco's Bohemian Club where women are not yet members, and there are private golf courses that prohibit women from playing on Saturday mornings...but that will all change pretty soon. After all, how much longer can restricted male bastions exclude what may soon be half of the leadership of Corporate America? Why would we want to be shooting ourselves in the proverbial foot when we could be shooting baskets?

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