Like walking in a neighborhood full of pickpockets and purse snatchers, living under the Obama administration should leave all Americans worried about what will be pilfered from them next.
In one of the most hypocritical moves yet — and that’s saying something — by a man who exhaled a lot of hot air in recent weeks, including during the State of the Union speech, talking about the importance of a college education, President Obama is now proposing to end tax-free withdrawals from 529 college savings accounts, diminishing (or perhaps even eliminating) their attractiveness as savings vehicles and thereby reducing incentives for millions of American families to create a college nest egg for their children.
Contributions to 529 plans are not deductible for federal income tax purposes but are deductible in 34 states and the District of Columbia. (Since seven states have no state income tax, 529 plans receive favorable tax treatment in all but nine states.) The income earned within a 529 plan can be withdrawn tax free when used for “qualified higher education expenses.”
The most recent study of the 529 program by the College Savings Plan Network says that “total assets and total number of open accounts have reached new record levels of more than $244 billion and 11.8 million, respectively.” The number of 529 accounts grew by six percent in the first half of 2014 alone.
President Obama is one of those 11.8 million, having contributed a stunning $240,000 to his daughters’ 529 plans in 2007. Since the president’s proposal would impact new contributions rather than those already made, it would leave his daughters’ college savings in good shape; he had the financial wherewithal to drop a quarter million dollars into those accounts all at once. But for those of us (including me) who make modest monthly or annual contributions to our children’s futures, we’re out of luck.
One objection that the left has to 529 plans is that it’s mostly upper-income folks who can afford to put money away for the future. Such a complaint is nothing more than the continuing class warfare being waged by Democrats. The College Savings Foundation reported last week that “over 70 percent [of 529 accounts] are owned by households with income below $150,000.”
The president says that he’d take the extra $2 billion in taxes he’d skim from Americans looking to put their kids through college and use it to fund a college tax credit for low- and middle-income families. I might like you and I might like your son or daughter, but my kids’ college savings are not your kid’s college savings.
It’s hard to imagine that even most liberal Americans — many of whom are upper-income suburbanites who put great value on their children going to college — will tolerate Obama’s hypocritical proposal and changing the rules mid-game. And of course, the Republican Congress won’t even consider such unwise and immoral policy. The real question is whether the GOP will be smart enough to go after Obama for his hypocrisy and his suggestion of a policy change that even many of his own base will oppose.
But wait, there’s more!
During Tuesday’s State of the Union speech (about which my further thoughts can be read here), the president said, almost as if an afterthought, that the tax code should be changed to no longer allow “the top one percent to avoid paying taxes on their accumulated wealth.”
We’re used to liberals hovering like vultures over the still-warm corpses of dead wealthy people, but it’s still a repugnant image brought back to us by a president who never saw a pile of money he didn’t want to redistribute. In this case, he wants to apply capital gains taxes to estates and trusts while simultaneously raising the capital gains tax rate.
The president argues that it’s “unfair” that the rich get to die rich whereas the middle class usually have to spend their retirement savings prior to death. Who outside of Venezuela and Havana still believes this sort of tripe?
He also suggests that a benefit of taxing estates more aggressively will end “lock-in” effects of capital gains taxes. In other words, according to the president, the fact that assets can pass to heirs in a way that adjusts upwards their basis (the price in excess of which taxable gains are calculated) means that in order to avoid capital gains taxes the rich will keep those assets deployed in a way that is not economically optimal. In short, they won’t sell stuff because they won’t want to pay tax on the gain.
One wonders if the president recognizes that the effect he’s describing — which is real — has been massively increased by his own hiking of the capital gains tax rate, which now has a top rate of 23.8 percent for high-income Americans, up more than 50 percent from the prior rate of 15 percent. (For those not in the highest income brackets, the rate went up to 20 percent.)
Now he wants to further raise the lock-in incentive by raising the rate to 28 percent and then tax people who react by not selling assets. It’s like changing the rules of baseball so that you’re not allowed to move out of the way of a pitch and then throwing beanballs at your opponents.
It might also benefit the president — were he open to facts — that, as Investor’s Business Daily noted in 2012, “Since 1981, every four-year period after the capital gains tax rate was reduced saw an increase in the amount of capital gains revenue the government received” and that in the four years following the one capital gains tax hike prior to the reign of Obama (which happened in 1987), “capital gains revenue fell from $33.7 billion to $27.8 billion, with an average annual decline of -12.8%.” Indeed, Bill Clinton’s vaunted budget surplus came about only after he enacted a Republican cut to the capital gains tax rate.
If only the spirit of JFK, or at least the memory of his educated and detailed explanation of smart tax policy, still lived within today’s Democratic Party…
Combining President Obama’s antipathy for success with his economic ignorance, you have a toxic brew out of which come policy proposals which are not just harmful but immoral. Fortunately we have a Republican Congress which, despite its many flaws, will, under the leadership (when it comes to tax issues) of House Ways and Means Committee Chairman Paul Ryan, keep these terrible ideas from becoming law.