Evening Must-Read: Josh Barro: Why Obama’s Proposal for 529s Had No Chance
There are two major taxes on the upper middle class in our future--the carbon tax and the tax on "Cadillac" health-care plans. But these tax are coming because they will not be levied on the upper-middle class but on entities classified as unworthy--coal and oil companies and health-insurers. They will just be passed through to the upper middle class.
So a lot rides over the next generation on the upper middle class's remaining confused about tax incidence:
...The second rule is that your family isn’t rich, even if you make a lot of money. President Obama’s State of the Union proposal to end the tax benefits for college savings accounts ran afoul of these rules, which is why he abandoned it, under intense pressure from both political parties, within a week. Tax-free college savings accounts, like the mortgage interest deduction and the state and local tax deduction, principally benefit people who range from affluent to wealthy. In pushing its proposal, the White House pointed to Federal Reserve data showing that 70 percent of balances in the college accounts were held by families making at least $200,000 a year. In theory, tax reform is supposed to be built around cutting back preferences like these....
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... $200,000 is not a normal income, even in a prosperous suburban county like Westchester, N.Y., where 77 percent of married couples are somehow managing to get by on less. In Montgomery County outside Washington, the figure is 72 percent.
These figures start to seem normal to politicians only because, when they’re not hanging out with ultra-wealthy donors, they tend to spend time with the sort of pretty-wealthy professionals who use 529 accounts. They also start to seem normal to reporters, perhaps because $200,000 is about what a married couple might make if both worked as correspondents for major news organizations. One reads frequently of the plight of living on $200,000 or more a year. Writing for The Fiscal Times in 2010, Karen Hube found that $250,000 ‘does not a rich family make,’ after you consider the cost of buying a home in an affluent suburb with a top school district like Bethesda, Md. (Of course, one option is to not live in Bethesda.) A Wall Street Journal article this September laid out how $400,000 isn’t a lot of money--after you spend it. Mr. Obama could still have tailored his 529 proposal... proposed to apply the same income and contribution limits that apply to Roths. That would limit the benefits to families making under $200,000 a year. Instead, perhaps because of the political firestorm, the White House dropped all plans to touch 529s...