Harold Pollack at Same Facts has a good long post on the political problems of capping 529 tax advantages for the affluent in order to change the tax system in a net revenue neutral manner that benefits people who earn under $100,000 per year. He notes the following:
President Obama himself established a big 529 account for his own children. He’s probably as happy as I am to pocket the tax break. He’s definitely right that there’s no reason for the American taxpayer to subsidize our kids.
I hope the president builds on his proposals to shift the various tax subsidies down the income scale to really help middle-class and working parents who face punishing college bills.
The easiest way forward for any new tax preferences and renewal of expiring tax preferences is to shift away from deductions towards credits with caps. I started working on my tax refund yesterday, and I know the child care credit is structured in a way that my current year self is getting less money in absolute and percentage terms of day care expense than my 2010 self did as my family is in much better financial shape now than we were in 2010.
Deductions in the tax code favor high income filers as a dollar that is deductible for someone making a million dollars a year saves forty cents in income taxes while that same dollar to someone making $20,000 a year and has a couple of kids is effectively tax free. The deduction for the second case is worth almost nothing. It does not change any incentives or add to the purchasing power of the family. Credits structured to be fully refundable and are capped benefit poorer families. If the arrangement is that childcare expenses up to $5,000 will get a 18% credit, a family making $20,000 a year and a family making $100,000 a year will see the same potential refund for that desired activity. Odds are the richer family will spend the entire qualifying sum and get the entire credit, but it is fairer.
KG
The fuck does that mean? Isn’t like 60% of what government does “subsidizing our kids”? Public schools, pre- and after- school care, vaccinations, dependent deductions in the tax code, public hospitals (since kids and the elderly are the most likely to get sick)? Or is this more of a “we’re super rich so we don’t need extra help”?
Corner Stone
I was completely mystified at why the WH would think the change to 529 plans was a good thing.
NonyNony
@KG:
The link to Pollack is missing – the link above goes to the Times piece that Pollack is talking about.
http://www.samefacts.com/2015/01/economics/the-president-was-right-though-politically-clumsy-to-go-after-those-luscious-529-college-accounts/
In context, Pollack clearly means “our kids” to be “the kids of the really well off”. As in taxpayers shouldn’t be subsidizing rich kids.
I disagree with this, actually, in that I think everyone should be given funding for four years of college if they choose to go – and public college tuition should be capped. Like we did in the old days, when the States funded their colleges, except with the money coming from the Feds instead of from the State governments. And that includes the rich as well as the poor – but the rich should pay more taxes for it because they have more money and it benefits them far, far more – whether they understand that fact or not.
jl
@NonyNony: Thanks for post to RM and thanks to you for link, but you talk like that commie Benjamin Franklin. Why do you hate America?
gene108
Tax credits are what we have devolved to, with regards to spending on poorer sections of society. because other alternatives, such as higher taxes on wealth – investments, income, etc. – and direct spending on social services, such as daycare have become politically impossible.
gene108
From Barro’s NYT article.
For members of Congress, many of whom are themselves millionaires and who make in $170,000+ a year, $200,000 is not a lot of money.
For other professions earning $200,000 a year in income, folks know it still does not make you independently wealthy.
You have more money to weather to the problems life throws at you, such as not having to shit bricks about where to get money to fix your car, but you are still one lay-off away and extended period of unemployment from burning through your savings.
The real problem is there’s not much reporting on how people earning median wage levels in their communities are getting squeezed by higher fuel prices, food prices and health care costs and therefore it’s harder to get by on the median wage than it was decades ago.
It hasn’t been drilled into people’s heads that most folks are economically worse of than their parents, at a similar age, because their wages are stagnant, while core commodities have gotten more expensive. Some people sort of feel this on an instinctive level, but they are not as up in arms about it that serious change must be effected because it is the will of the people.
azlib
I agree that tax credits with a cap distribute benefits downward in the income scale. This particular credit for education would be unnecessary if we really funded public education properly. I am coming around to view that education through college should be free to all. Saddling people with education debt right out of college is a terrible mistake.
geg6
The hit that Obama was planning on 529 plans makes no sense and I’m glad they’ve rolled this back. The idea that this is some giant giveaway to the wealthy is ridiculous. I work with many families that have 529s and they are not exclusively wealthy (in fact, my experience of over 20 years in student aid anecdotally demonstrates that the wealthy don’t plan for college any better than the poorest among us and, often, do even a worse job of it). The vast majority of families that I work with that have 529s are in the $50,000-$90,000 income range. The plans are set up when the kids are born. Grandparents, aunts/uncles, godparents all put money into it over the years. Many put all the First Communion, confirmation, bar/bat mitzvah, etc. cash into the account. Some put inheritances from grandparent deaths into it. It’s the sum total of the kid’s entire life savings. And it’s one of the few savings programs for college that does not penalize a student for saving for college on the FAFSA. This was always a stupid plan.
raven
@Corner Stone: I guess the White House rationale I posted when you asked before wasn’t enough huh?
Corner Stone
@raven: I saw it the first time you posted it, even though it wasn’t then as a reply to me. But that rationale is exactly what I alluded to – mystifying.
This was a very poor plan/process/thought, and it should have never seen the light of day. They weren’t simply wrong, they were stunningly, tone deafeningly wrong.
Roger Moore
That may be the easiest way forward, but it still won’t be easy because the people doing well under the current system will fight tooth and nail to keep their advantage. A better approach would be to convert all tax expenditures to explicit subsidies. Most of that stuff would never survive if people saw the real picture of who was benefiting.
Josie
If we are to come up with ways to strengthen the middle class, we should define our terms. What exactly is middle class, what is upper middle class, what is wealthy, etc. I think sometimes politicians operate in a bubble and do not know what incomes people are earning and how far they stretch (or don’t stretch).
raven
@Corner Stone: I agree but that’s what they thought.
Corner Stone
@Josie:
Good luck with that. I have wingnut neighbors who will include people making up to $1M a year in “middle class”. In fact, they won’t actually ever say a number that moves someone out of the middle class.
Cervantes
Richard, have you seen Paul Farmer’s recent article on health-care financing? If not and you’d like to, let me know and I’ll find an accessible version.
Another Holocene Human
@KG: He means the upper middle class who will do just fine without the tax help.
Obama is a millionaire. He doesn’t need another college tax break. It’s the poor who can’t even afford the fees and housing on a full scholarship for their kid who made the grade who need help … fast.
Another Holocene Human
@NonyNony: State school should be free and housing/meals subsidized like in Germany.
If the privates want to compete they could start by bringing tuition down.
All those Stafford loans paid for was fancier admin buildings, alumni ass-kissing buildings, fancy dorms for rich kids, brand new gyms for rich kids, and other stupid frills. Class size isn’t smaller, academic standards aren’t higher, and kids are leaving college in worse financial shape than ever.
Obama is absolutely right, we need to stop using the tax code to funnel money from upper middle class parents with highly-rated kids to institutions busy gilding everything in sight including top administrative salaries.
Do you know colleges used to be run by professors and the president maybe made 4x or 2x if that what a top professor made? And without those layers and layers of admin? Amazing!
Another Holocene Human
@Josie: Moving target as the upper end keeps stretching out further and further every year.
Another Holocene Human
@gene108: The real story is that the Obama’s have kept in communication with working class people and are aware and tied into the experiences of the 80%.
This 529 thing would have hit the top 20%.
The fact that they’re crying about their “struggles” while doing better than 4/5 of the American population just goes to show how economically segregated the US has become.
gian
@Another Holocene Human:
It’s an amazingly bad idea. To pitch it as middle class economics is nuts.
The middle class need more help paying for college not less. The size of the tax benefits are limited by the cost of the school. Make the school cheaper for everyone and you reduce the tax benefits for the wealthy. And really is this a serious % of wealthy people’s tax breaks. More than the fact that capital gains is taxed way lower than labor gains?
Corner Stone
@Another Holocene Human: I started a 529 when my son was 4 months old, and set up an auto payment plan. I undertook that action based on certain criteria laid out by plan literature.
If it had other, different parameters I would have evaluated the terms and made the best decision available to me.
Having contributed to something for 10+ years and then being told, “No. Not so much.” Just as a way to bundle in tax “fairness” for people who are far, far, far wealthier than me does not add up to a reasonable rationale.
It’s not about crying or struggles.
Corner Stone
Man, I can’t even watch a few seconds of that Palin speech. Makes me think she has Another Holocene Human as her speechwriter and/or teleprompter typist.
Buddy H
@Josie: If we are to come up with ways to strengthen the middle class, we should define our terms. What exactly is middle class, what is upper middle class, what is wealthy, etc. I think sometimes politicians operate in a bubble and do not know what incomes people are earning and how far they stretch (or don’t stretch).
Very true. I remember years ago, I think it was 1988 or 89, I went to hear Mario Cuomo give a speech. He was talking about the middle class. He was sort of speaking “off script” just riffing with his oratory. He said something to the effect of a person in the middle class making fifty thousand a year and thinking they’re doing fine. He sort of implied that was a shit wage. I remember thinking “jeez, I’d love to be making fifty grand a year….” I think my yearly wage was something like twenty-six grand.
Buddy H
@Corner Stone: I can tell you this: whoever was running that teleprompter must have gotten his ass handed to him when Sarah got off that stage.
I bet he’s still having nightmares.
burnspbesq
If anything, education savings programs should be more generous, not less.
Under the current system, there is simply no way that a family at or below the 90th percentile of the income distribution (in 2011, per the Spring 2014 edition of the IRS Statistics of Income Bulletin, the 90th percentile was at adjusted gross income of approximately $116K, and that family probably paid combined federal and state income tax of around 22 percent, leaving them with about $7,500/month of after-tax income) can put a meaningful dent in the cost of sending two kids to college, even if they are extremely aggressive in putting money into a 529 plan and put it in one of the highest-yielding portfolios.
You can build whatever favorable assumptions you want into your model, and you still can’t get $400K to fall out at the bottom. Which means that the private colleges that have historically provided entree into significant upward mobility are off limits to that 90th-percentile couple’s kids. Those kids may still get a quality education if they live in the right state, or if they borrow as much as they can, or if some school wants them badly enough to give them some non-need-based aid, but they aren’t going Ivy/Stanford/Duke/Georgetown/Williams/Claremont/etc.
That’s not fair.
burnspbesq
FYWP arbitrarily and capriciously eated my comment. This action should be vacated and remanded.
Barbara
@Another Holocene Human: You said pretty much what I was going to. We’re all chasing after that shiny ball, or whatever it is, distracted with this discussion of 529s, and how they should be structured.
All the while forgetting that there used to be colleges that were FREE — in California, and the City of Cincinnati, and New York City, and those are only the ones I’ve heard about, there may have been others.
My older cousin went to City College in NYC back when it was free. She jokes that since she was an English major, all the books she needed were novels, and she could take them out of the public library, and because she lived at home, her only expense was subway fare.
It’s all just another piece of the public commons that we don’t believe in any more.
David in NY
@Corner Stone: “I was completely mystified at why the WH would think the change to 529 plans was a good thing.”
Because it doesn’t do, very well, what it should do, give sufficient incentive to people who wouldn’t save for their kids’ college, to save. What it does do, is give a gift to the affluent who would save anyway (or who just have lots of extra money) by letting them park their savings in tax-exempt accounts. And this is mostly who benefits from 529’s.
I know. I had savings I laundered (there is no better word) through 529’s just to save some bucks. But I’d have saved that money anyway, in fact I already had, so the money I saved in taxes was a gift, and as a policy matter, pointless.
Another Holocene Human
@Barbara: Rice University used to be free.
And even the Ivies used to be on a much meaner, dare we say, scholar’s budget.
Another Holocene Human
@Corner Stone: Why would the thing not be phased out?
Where did Obama suggest cutting it all off right away with a big tax bill rather than phase out? Shit’s always phased out.
But go on. Cry more insincere tears. Obama could never match your towering intellect.
Corner Stone
@David in NY:
Bullshit. I started out saving $20 each paycheck and put in each birthday or xmas gift into it for over more than the first 5 years.
There was nothing affluent about the start of this account. I put money I could barely afford, to work for my child’s future needs. How is that a bad thing, and why should I feel like some kind of cheat for using a vehicle that was clearly defined when I entered into the agreement?
Corner Stone
@Another Holocene Human: Incoherent as usual. Please proceed, dumass.
pseudonymous in nc
The same people who will talk abstractly about a simplified tax code will scream blue murder if it’s suggested that their favourite deductions should be simplified out of existence. The 529, the HSA, the mortgage interest deduction, all of this shit should go away. Charitable donation deductions, too: go to something like the UK’s Gift Aid where the IRS sends each charity a lump sum to match the taxes paid on donations.
On education, it seems to me that it’s a lot like fuel efficiency. You save more gasoline turning a 4MPG gas-guzzling truck into an 8MPG less-guzzling truck than you do getting a sedan from 32MPG to 38MPG. You make a bigger impact getting clever poor kids into college without a massive tuition burden than putting a bit more money in the pockets of affluent college-educated parents wanting to send their kids to nice colleges.
pseudonymous in nc
@burnspbesq:
As the old line goes, if something can’t go on forever, it will stop. The tuition racket will, eventually, stop. People will start sending their kids to European universities where, even as international students, they’ll pay less than at many US institutions.
The 529 is just another way that the nation as a whole perpetuates the tuition racket.
pseudonymous in nc
@Corner Stone:
That’s fine. It just makes it a lot harder to justify reforming the clearly defined vehicles that allow Mitt Romney to have a $100m IRA.
You’re proving my point that it’s an irregular verb: I use clearly defined vehicles; you put your money in tax shelters; he’s got $100m in an IRA from some creative accountancy involving the Cayman Islands. They’re all legal fiddles, and their existence is why We Can’t Have Nice Things unless you’re a university administrator picking out a new S-Class Mercedes.
Corner Stone
@pseudonymous in nc:
Hey friend, that’s fine. I, personally think state schools should be free. But how is eliminating investment vehicles for people who can’t afford the full ride get us any closer. In real life?
Corner Stone
@pseudonymous in nc:
No they won’t. Are you that fucking stupid? And those that do…how does that help anyone outside the class of people who can afford to do that?
I can’t send my son overseas for a college education. WTF are you talking about?
Corner Stone
@pseudonymous in nc: No, I am not proving your stupid fucking point. I work for a fucking living. I put money I could barely afford into a vehicle to benefit my child – aka the American Dream ™ .Don’t fuck with me that somehow I’m a richie rich because I played by the fucking rules to try to grasp a rung above where I started from.
Fuck you.
MobiusKlein
@Corner Stone: corner baby, how much $ did you benefit from the tax deductible aspect of the 529 plans? Is there a different structure that would get you a comparable benefit, while not being a giveaway to the 1% ers?
That’s the point folks are trying to communicate!
Corner Stone
@MobiusKlein: I don’t think you understand what the 529 plans do, Mobius baby.
There are a number of ways to get to kids having a decent shot at higher ed.
Not what we are realistically discussing here.
pseudonymous in nc
@Corner Stone:
Oh, fuck right off. I’m not saying you’re a fucking ‘richie rich’. I’m saying that your jerking knee is part of the reason why We Can’t Have Nice Things, because you don’t want something that is in practice a tax shelter for the upper middle class to go away.
You are their unwitting ally in class warfare. You are the reason why Mitt Romney got a nice little tax benny for his four sons that wasn’t available to poor kids and their families. Sorry about that.
The best way to use the amount of money that the IRS essentially gives back to fund rich kids’ tertiary education is not through legal tax havens.
pseudonymous in nc
@Corner Stone:
The only reason ‘realistically’ is part of the equation is because you’ve been enlisted to have a juvenile shitfit on behalf of all the upper-middle-class tax dodgers who want to send their spawn to Stanford.
Corner Stone
@pseudonymous in nc: No, fool. I have looked at where we are realistically. I can do what, please pray tell? Yell at Romney and the small number of rich people who bother with 529 plans? Or understand that I have a reasonable vehicle to mitigate the insane tuition fees?
Because I can’t fucking change the cost of college, you dumb fuck.
What, I’m supposed to tell U’s that I’m not going to send my son and their tuition money to them?
Corner Stone
@pseudonymous in nc:
HAHAHAHAHAHAHA!!!
Ha! Go fuck yourself, fool!
Corner Stone
@pseudonymous in nc:
Who will do this? Please. Please fucking delineate the class of US families that will do this.
GFY.
MobiusKlein
@Corner Stone: are you always this much of a jerkface? Can’t say you are making allies with yer ranting.
Tell me in $, what your savings vs. using regular account are. Then x10 it for what the actual rich get. Then ask yourself, is there a more fair way to distribute the total tax expenditure?
Corner Stone
@MobiusKlein: What are you even talking about?
Listen, I have said here many times that I would prefer a top tax rate of 90%, not to even get to discussion of inherited wealth and tax rates.
But man, we can dream about what we want or we can work with what currently is. That’s what I did, as well as millions of other non-wealthy families.
But if we want to change the playing field, I think we should be real about who it is that’s paying the price. Wealthy families aren’t going to *not* send their kids to the U because of tax implications.
So who does this impact? It ain’t fucking Romney, et al.
Corner Stone
@MobiusKlein:
Not a lot of allies to be made here on this, apparently. I’m not begging for dollars. I’m not wealthy, nor stealing from coffers.
But this doesn’t seem to be an issue that some can rationally approach.
I’m not parking tax sheltered wealth away from The Man. I’ve just been trying to give my child a better chance/opportunity than I had at that age.
By entering into an arrangement with certain parameters and following the rules.
Gian
@burnspbesq:
I do hate to say this, but he is right on this.
pseudonymous in nc
@Corner Stone:
Except you are; and more importantly, you’re providing a childish ranty frontline for actual tax-shelterers to point at and hide behind.
Which is fine, but you’re doing so in a way that doesn’t help much. You’re giving a better opportunity to the already-rich, not to your child. The American tax code is good at making suckers of the lower-middle-class to benefit those people who truly believe they’re struggling on $200,000 a year.
Charles
@Corner Stone
This discussion seems to have devolved, but assuming you’re at the income level you describe, the proposed plan would have been the best of both worlds for you:
1) you would have retained all the tax-free contributions you had already made to the 529
2) you would have begun receiving a tax credit, the value of which would dwarf what you were previously saving using the 529.
The elimination of the 529 tax benefits would only have been on future contributions. I’m struggling to understand the anger here, especially when this is a huge net positive for someone making under $100K a year.
Gian
@Charles:
this event makes me think of the a-holes who want to means test social security.
you draw this line and then never move it and in 10 years buger flippers don’t qualify.
Charles
@Gian:
Could you elaborate? I don’t follow.
Cervantes
@Charles:
He’s afraid that a dollar-denominated means test will soon be devalued by inflation. One day the means test excludes people earning $40,000 or more; in ten years, the test is not adjusted for inflation, even people who flip [burgers] will be excluded.