Why Obama’s Plan to Kill 529s Failed
Posted on January 29th, 2015 in Uncategorized | 18 Comments »
Writing in the Times, economist Josh Barro argues that the plan fell afoul of opinion-leaders who are affluent—making more than $200, 000 a year, say—and lack the perception to see that 529s largely benefit the affluent.
But in practice, politicians from both parties have made a point of holding the group you might call the “merely affluent” harmless from tax increases. If you make $150,000 to $225,000, you make about two to three times the national median income for a married couple. The list of occupations that can get you into this income bracket — government official, academic, lobbyist, journalist — can sometimes make it hard for people in political circles to remember that 92 percent of American married couples make less than $200,000 a year.
As someone who squarely fits this description—I’m a journalist, my wife works, our household income is above $200k—and someone who thought Obama’s plan was a mistake, I wince at being pegged so perfectly. Still, I think the full story is slightly more complicated.
I am certainly grateful to have the financial resources that I do, and recognize that they are greater than those most Americans have. But at the same time, I certainly don’t feel rich; my wife and I live a fairly modest life. We have two young kids, two car payments (living in the suburbs because we can’t afford New York City’s private schools and the public ones aren’t very good, you have to have two cars; we drive a Ford and a Volkswagen), a mortgage, health insurance, child care, pre-school, property taxes, electricity, car insurance, heating oil, food, clothing, diapers—it adds up. We try to put $5000 a year into each of our kids’ 529s, but that $800 or so bucks a month is not easy to carve out once the bills are paid. And while we don’t have to pay New York state tax on that income, we still have to pay federal tax on it. Yes, it’s compounding tax-free, but we’ll pay taxes on it when we cash out to pay our kids’ college (assuming, of course, that they decide to go to college). In the meantime, we’re not using the dividends to take a vacation; they’re just accruing so we can try to pay tuition fees.
But here’s the thing: My kids are, roughly, 3 and 1 years old. By the time they’re old enough to attend college, one can reasonably expect annual college costs to have broken the six-figure mark. (That’s nuts, but…a topic for another time.) So let’s say I’m reasonably fortunate and have, oh, $150, 000—$200, 000 parked in my kids’ accounts by then. That’s an amount to pay for college that prior generations would have considered an obscenity. And it’s still not nearly enough—not unless you get additional financial aid, which at that point may be more accessible for families with lower incomes than for people like me.
So the 529 is a very important savings device for us, but it doesn’t feel like a wildly unfair benefit—it feels like something everyone should have access to, up to a reasonable point. The thing that seems wildly unfair is the cost of college, and that perception carries into a level of affluence well beyond my own.
I think it’s really this state of affairs that doomed Obama’s plan. I grant that 529s disproportionately benefit the more affluent, like my wife and myself, simply because we can afford to save more money. But this is no scam, like the carried interest of hedge fund managers; no one’s getting rich off this, sitting around thinking, hah-hah, can you believe this is legal? In the case of my wife and myself, we’re making tangible sacrifices to save that money, and it can only be used (without significant tax penalty) to pay for college.
It’s hard to feel outraged about the inequity of a tax break like that. But it’s easy to feel outraged about a Democratic president threatening to take it away.
18 Responses
1/29/2015 7:00 am
What I don’t get is why marginal income tax rates don’t keep going up when incomes reach a million or a billion per year? For most people, your marginal tax rate keeps increasing as your income goes up, but then it flattens out permanently for people above about $450,000 or so. Tom Brady pays the same marginal tax rate as somebody making a small fraction of his income?
Why not raise the income tax rate 3 points on income above $4.5 million and another 3 points on income above $45 million and another 3 point on incomes above $450 million. What? They can’t afford it?
1/29/2015 8:56 am
“In the bigger picture, the existing welfare state is unaffordable. Either it will have to be cut, or reformed, or paid for—by someone, somehow. The administration and its allies would like to reassure you that the someones who will pay for all of this will be limited to the richest of the rich, but in practice there’s only so much money that can be squeezed out of the extremely wealthy.
Which means that eventually, anyone looking for ways to keep the welfare state afloat will have to go after after the middle class—and, in particular, middle class savers. That’s where the money is.”
Peter Suderman at Reason, “How Obama’s 529 College Tax Plan Debacle Proves the Welfare State is Doomed”.
1/29/2015 9:40 am
An unassailable, argument, eloquently put. As one who often plays the imaginary exercise of pitting myself against those who seem more or less equal to me, but so much better off in the circumstances mattering to Americans, I appreciate the honesty and humility - and revealingness - of this post.
1/29/2015 10:24 am
As a state-school graduate who worked part time to pay the rent while in school, I cannot understand blue-state professional parents’ unwillingness to send Junior to a moderately-priced public university. $150-200k? I don’t care if it’s an Ivy, you’re getting ripped off.
1/29/2015 12:12 pm
Steve, you could confiscate every cent from America’s 100 richest people, and it still wouldn’t pay for all the free chit all y’all seem to think you “deserve”.
Go ahead, eat “the rich” today; but who are you going to tap for your free supper tomorrow?
1/29/2015 1:12 pm
Anytime you’re arguing that $200K+/year isn’t taking you very far, no matter where you live, something has gone wrong in either your analysis of what “very far” means, or in your spending habits.
Besides the rather curious claim that NYC public schools aren’t very good (there are many excellent ones), this is also a choice you have made. It has also incurred other costs for you, like car insurance and suburban property taxes. That’s all well and good, but these are voluntary payments you have undertaken.
$200K isn’t that much in the New York area once you spend it all, you’re correct there, but that’s neither here nor there with respect to whether you are affluent or not.
1/29/2015 1:41 pm
Kostya-Do you even live in New York? There are not “many excellent” public schools in the city, and there is fierce competition to get into the handful of good public schools that do exist. In Brooklyn, where I most recently lived, people were buying real estate in certain areas simply so their kids would be eligible to get into a couple different public schools—and even then, they weren’t guaranteed a spot, because so many other parents had done the same thing. That’s nuts.
Granted, by choosing suburban public schools, we have incurred some additional expenses like cars and property taxes. That is still less than the cost of buying real estate in New York and paying for private school. (Not to mention New York City income tax.) And the school system where we now live is vastly better. And we don’t pay $1000 a month in building maintenance fees. Etc., etc.
Now, I could live half an hour farther out and cut costs somewhat—not considerably, but somewhat—but that would mean almost a 3.5 hour round-trip commute and never seeing my children. But it’s not like I could move away from the New York area, because my job is in New York and good journalism jobs are increasingly rare.
Don’t get me wrong; I’m not complaining. We’re healthy, we have a roof over our heads, we go out to dinner once in a while. But we are not living fat and happy on the proceeds of our 529 tax-savings….
1/29/2015 2:58 pm
“And while we don’t have to pay New York state tax on that income, we still have to pay federal tax on it. Yes, it’s compounding tax-free, but we’ll pay taxes on it when we cash out to pay our kids’ college (assuming, of course, that they decide to go to college).”
To be clear: you will NOT have to pay Federal tax on withdrawals from a 529 plan for college. That is the benefit that Obama proposed taking away and replacing with tax deferral only.
1/29/2015 3:59 pm
Far be it from me to not allow you your feelings, but…they’re just feelings, like how people FEEL like they could be sexually assaulted at any minute while they’re attending college. I mean, it seems like you’re pocketing all of the luxuries your successful life has allowed, and choosing to focus on a set of nested possibilities (that your kids will get into college, that they’ll choose a college that is expensive, that college will be far enough from your house that they’ll need to live there) that seem very remote to 90%+ of us.
For example, I’m not able to save anything for my kids’ college right now, because I’m dumping $1800 a month into child-care/preschool for my two kids. Your concerns of not being able to shelter the investment income you enjoy from the full burden of taxes ring pretty hollow, and I’ll gladly take your taxable income if it means I could entertain the notion of starting a college savings account of my own…
1/29/2015 4:22 pm
Of course you are correct, DWAnderson-I misspoke.
Justin, the question is not whether it’d be good for you have to have a higher income in order to put some money away for your kids’ college. Absolutely. The question should be, if you were able to save month to month, should college savings be tax-free?
I will tell you that, quite frankly, I would feel wealthier if I didn’t save that money for my kids’ college. It’d be easier to pay bills, for one thing.
By the way, I’m curious: Would you have voted for Bill de Blasio? He promised—and instituted—free universal pre-K for New York City kids. I don’t like de Blasio a lot, but that was a major achievement.
1/29/2015 4:59 pm
RB, yes, I do live in New York. I live on UES, and work in midtown. And yes, I disagree that one needs to move to the suburbs get good schools (and even more broadly disagree about the importance of good schools - your kids will succeed or not basically irrespective of school quality).
I don’t think you’re living fat off 529s, but it remains a bizarre tax quirk designed to benefit the more affluent members of society. Yes, you have expenses. So does everyone. You’re still making a tremendous amount of money, even after accounting for cost of living. It falls a bit on deaf ears to say 200K doesn’t go very far in the New York area - even in the city, that’s a very high income.
1/29/2015 6:21 pm
Two points, one about the cost of education, and the other about where the money is and how much there is of it:
1) RB - One of the reasons higher education costs so much is because of how much professors get paid for doing so little work. Two examples: (Now senator and fake Indian) Elizabeth Warren was making $350K for teaching one class per semester at Harvard, and she had an interest-free mortgage and other interest-free loans from the school… and she has the gall to say education costs too much. Jonathon Gruber of MIT similarly has an interest-free mortgage because he wanted to live in a nice area… it speaks to the elitist attitude of the Grubers of the world that they feel they are too good to live among the rest of us in spite of getting salaries and benefits that rate them among the affluent.
2) Here’s a simple exercise anybody can do themselves to educate themselves about how much money the rich have to bail us out: Get the latest copy of the Forbes 400, add up their aggregate wealth, and compare it to our annual budget deficit… even it we confiscated every cent of their wealth, we would still come up short. The dirty little secret is that the available money is in the middle class… and they don’t have the lawyers and accountants to keep it out of the government’s hands.
1/29/2015 6:53 pm
There’s a conflation between saving and investing being made here that I think illuminates the trouble you’re having. Investing requires a certain level of capital that you take for granted; hell, it’s hard to find an interest-bearing savings account these days unless you pony up a grand in advance.
1/29/2015 7:19 pm
If I had children and were not making enough to know that I could easily afford paying for their post-secondary education, my thinking would probably go something like this:
Do what you can to afford living in a part of town with a good school, where they will not be sharing a classroom with violent troublemakers and drug users. If this is difficult to do, keep working on it, it’s much more important than being able to save $$$ for college.
Are they bright (130+ IQ)? Make sure they get grades to match. Start positioning them early on to get offered scholarships by top- or second-tier institutions. Instill good working habits and self-discipline so they will be on the Dean’s List every year.
Are they above average (115+ IQ)? Encourage them to pursue interests in the STEM field. Check out the public universities offering low in-state tuition fees. Instill good working habits and self-discipline in them.
Are they of average intelligence or below? Consider switching them to a vocational school preparing them for a career in the trades. Skilled blue-collar work can pay well and if one has some business talent, enable one to live a live of greater independence than a white-collar drone in a cubicle. Instill good working habits and self-discipline in them. (This option should also be considered for above-average and bright kids if that is what they really want to do.)
Above all, don’t fixate on the idea that “my son/daughter must get into Harvard/Yale/other Ivy so that s/he can meet and network with future Masters of the Universe and become one of them, too.” Be up-front and tell your kids early that their post-secondary education will be largely of their own making.
Strictly for what it’s worth.
1/30/2015 11:01 am
I have to agree with Kostya that your post lacks perspective. There’s no doubt that $200,000 doesn’t go as far in the NY area that it would in most places. However, even there, it provides an affluent lifestyle and only by surrounding (isolating) yourself with other affluent/wealthy/rich people does it come to seem like you’re not very well off. You must be aware that literally millions of people live in NYC on far, far less.
You’re setting up a straw men to say that the only people who are affluent are those who drive BMWs and pay for private school and live at a nice address in Brooklyn/Manhattan. Living in a nice suburb of NYC in a nice house with 2 cars and being able to afford full-time childcare and health care and save for retirement and your children’s colleges and pay for a good school district is a luxury most Americans cannot afford. Just because you cannot ALSO take fancy vacations and splurge on fancy dinners does not make you “not affluent.” That’s where perspective comes in - what most Americans - even most very hard working Americans - can expect to have. (Spoiler: it’s not the list of nice things you have.)
The truth is this benefit doubles down against the middle class - if affluent people are able to save for college tax-free and poor people are able to qualify for federal grants, then these factors will contribute to keeping college costs high - colleges will charge what they can get away with - and the middle class will be boxed out. Or saddled with insanely large debts.
1/31/2015 2:37 pm
We shouldn’t forget two things about this, not that it will help (Obama is term-limited out):
1) The Obamas themselves contributed $240,000 tax-free to their own children’s 529s in 2008, making his proposal — no surprise — as hypocritical as everything he does.
2) Isn’t this yet another violation of his promise not to raise taxes on the middle-class? Oh, my bad… I’m obviously a racist for point this out.
1/31/2015 3:44 pm
The 529 tax break may not “feel like a wildly unfair benefit” to you, but it does to me. Your family is in the top 5-10% of earners, and you are effectively asking the other 90-95% to subsidize your college savings.
1/31/2015 7:27 pm
Add me to those saying your post lacks perspective. I’m a single parent (now grandparent), was the primary financial support for my son, and made well over $100K/year for a good decade or more in the tech industry before the crash. Then I switched to full-time tutoring/test prep, followed by public school teaching. I live in a very expensive area, and paid a lot in rent over the years because I couldn’t afford to own, but wanted to be sure I was in an area where my son had at least adequate schools. Like you, I made quite a bit of money yet felt constantly cash-strapped. Enough for niceties like a vacation timeshare, but not enough to feel rich enough to fly to a lot of them. Since I didn’t have two income streams, I made less money than most married couples in my area yet, ironically, often didn’t qualify for tax breaks designed for single parents because I made too much money.
So I understand your tradeoffs, and still would observe that these are “problems” perhaps unworthy of a tax break.
I think free community college for all is a moronic idea; the problem with college is not cost, but readiness. I’m just not convinced the 529s are really useful for any population but you, the people who say, without irony, that they have to struggle to save $800/month purely for college that’s 15 years away.
The thing is, you all have the mouthpieces. A lot of the people who complained were, in fact, journalists, pointing out the problems with the proposal when it actually affected them. Meanwhile, most journalists are liberals, and often sneer at the *actual* middle class for opposing welfare, immigration, and other “benefits” that have advantages for the affluent (cheaper labor) or the very poor (entitlements) without leaving much for them.
This bias is worth considering, at least.