Under fire from Republicans and even House Democratic leaders, the White House withdrew this week its plan to end the tax-free status of the college savings accounts known as 529 plans. It’s the first political debacle of 2015 for President Obama on the domestic-policy front — but a part of me almost admires him for trying this particular gambit.
The idea of taxing 529s was, in hindsight, so politically naive that only an administration guided by a genuine belief that it was the right thing to do could have proposed it.
Otherwise, the president’s advisers would have understood that this idea was guaranteed to alarm at least four powerful groups: The financial industry feared losing a $244.5 billion business. Higher education feared the curtailment of a subsidy. State governments, which administer 529s, feared losing a popular perk for voters (and the power to allocate lucrative contracts to fund managers). And, of course, parents with college-bound kids freaked out, because that’s what parents with college-bound kids do.
All that remained was to tie this bundle of political toxicity up with a bow, stamp “middle-class tax hike” on it and deliver it to John A. Boehner, Esq., c/o U.S. House of Representatives.
Before the moment passes, though, it’s worth analyzing for broader lessons about the possibilities for structural economic reform in the United States, at a time when both of our political parties are competing for the poll-tested title of Middle-Class Hero.
Lesson No. 1: Comprehensive tax reform — a grand swap of lower rates for fewer deductions — is going to be very, very difficult.
The White House was right to say that 529s disproportionately benefit wealthy people who could send kids to college without it and that taxing the earnings in new accounts could help pay for better targeted college-access policies.
The 529 industry’s rapid-responders produced statistics showing that non-plutocratic families take advantage of 529s, too, as they undoubtedly do.
Yet it is a simple arithmetic fact that tax deductions are most valuable to upper-income taxpayers, because they pay the highest marginal rate. This is doubly true for tax-advantaged savings, since rich people save more.
In other words, 529s function much like other provisions in the code whose benefits skew upwards but can, and will, be portrayed by lobbies as vital to the middle class — the deductions for mortgage interest and state and local income tax come to mind — if anyone tries to curtail them.
Lesson No. 2: The high cost of a college education is gradually driving America insane as well as bankrupt.
Okay, that’s an exaggeration. A fairer statement would be: There is so much public anxiety about paying for college, and the anxiety is so well founded, that it’s eroding government’s capacity to untangle the many contradictory strands of existing policy.
At present, government subsidizes both college saving, through 529s, and borrowing, through subsidized loans, and, in Obama’s proposals, more generous education loan forgiveness.
The net effect of this schizophrenic approach is to inflate tuition, because government’s support for tuition payment is not conditioned on cost-containment.
Everyone is aware of this, but no one has much incentive to do anything about it, because middle-class parents — i.e., voters — focus on the issue episodically, when their own kids go to college. And then their concern is, understandably, taking advantage of whatever subsidy for which they may qualify, not the system’s long-term sustainability. The status quo is the devil they know.
Meanwhile, the permanent players — institutions of higher learning, mainly — lobby furiously against the slightest whiff of “price controls.”
From that perspective, Obama’s plan to shift resources from 529s to a tuition tax credit aimed at lower-income families amounted to rearranging the deck chairs on the Titanic. What the middle class really needs is a serious plan to contain tuition costs.
Which brings us back to the fact that middle-class voters seem to have rebelled against the administration’s 529 proposal, even though their income cohort as a whole stood to gain from it, in a statistical sense. Supporters of the president’s plan found this “baffling,” as one of them, Robert Greenstein of the liberal Center on Budget and Policy Priorities, told the New York Times.
There’s nothing baffling, though, or even terribly surprising, about a political backlash from middle- and upper-middle class people who don’t trust government and don’t want it taking away benefits to which they’ve come to feel entitled, whether they have a right to feel that way or not.
In fact, that’s a fair description of the political dynamics underlying America’s fiscal predicament — and a reason to worry that the two parties’ competitive pandering to the middle class will make that predicament only worse.