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.