529 Accounts and Tax Fairness

Tax changesPresident Obama recently announced a series of tax changes he will propose or at least politically push for in the coming year.

Since the US Congress constitutionally controls the power of taxation, and Congress likes Obama as much as I like Pete Carroll’s Seahawks, I understand that Obama’s priorities may not come to pass any time soon.

Still, I got mad when I read this week that Obama proposes ending the tax advantages of 529 education savings accounts.[1]

seattle_seahawks_suck
I like Seattle like Congress likes Obama

My first thought: “That’s not fair!”

My second thought (and one of my favorite family mottos): “’Fair’ is for kids.”[2]

My third, kind of extended, thought: While nobody actually enjoys paying taxes, a key test of the acceptability of a tax is whether it seems ‘fair.’ And tax breaks, just like taxes themselves, also have to seem, and be, basically ‘fair.’

How do we know if something is fair? It depends a tremendous amount on which taxes one pays and which tax breaks one takes advantage of.

In the case of 529 education accounts, I had always considered them an extremely fair tax break, combining one virtue (long-range savings) with another virtue (higher education) with compound interest (the greatest of all possible things in the known universe).

529 accounts

But of course, 529 accounts are fair, to me, because I’ve started them for my young girls. I appreciate and value the tax break on future capital gains because I have a chance to benefit from them when my girls go to college.[3]

For people who haven’t started 529 accounts, or have no chance of investing for their kids this way, the tax breaks may appear targeted at some unattainable upper-middle class, college-bound elite, and therefore the tax break is inherently unfair.

I was interested to read yesterday in the Wall Street Journal the White House’s argument that 70% of benefits of 529 accounts go to households with incomes over $200,000, or the top 4% of tax returns. I hadn’t known that, nor had I imagined the benefits of 529 accounts were enjoyed by so few.

In the light of that data, my fair tax break seems a little less fair. Or at least, it seems like something that could be eliminated and replaced with something that would have a broader benefit.

Not that it’s going to happen anyway, because Obama doesn’t make tax policy, Congress does.

 

PS – 4 days after I posted this, Obama backtracked and said he won’t push for a change in 529 Accounts, after taking flak from both Dems and Repubs.

 

Please see previous posts on 529 Savings such as:

Compound Interest and College Savings

The insanely rising cost of college – Interview with a College Advisor

Is the financial model for college broken – Part 2 of Interview with College Advisor

College Savings vs. Retirement Savings

 

And previous posts on taxation such as:

Shhh…Please don’t talk about my tax loophole

Adult conversation about tax policy

 

[1] Importantly, on the issue of fairness, Obama proposed eliminating tax breaks for future investment growth obtained on contributions to a 529 account, not for investment growth on past or existing investments in 529 accounts. In other words, there’s a grandfather clause for existing 529 amounts, a common key ‘fairness’ element to taxation changes.

[2] My favorite kid and ‘fairness’ story in my family, which I’ve mentioned in another post: My then-4year-old niece told us all over dinner “It would be fair, to me, if you gave me a bubble bath after dinner.” She knew fairness mattered to adults, and tried to shoehorn her interest in bubble baths into an adult framework. She’s seventeen now and soon off to college. Cool kid. Ever after, I try to use the “It would be fair, to me…” argument with my family as much as possible.

[3] Here my wife and I always add “should they choose that path.” Because they may decide instead to run away with the circus. My older one is pretty good on the rings at the gym.

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It’s Nate Silver’s World, And We Just Live In It

With less than two weeks to go in the election, that Jay-Z song has been running through my head, because indeed, “Who is gonna run this town tonight?”

But the answer I keep coming back to isn’t Mitt or Barack, but rather Nate Silver and his Five Thirty Eight site.  Everyone I know is absolutely addicted to his analysis and will be until November 6th.

Silver is the true thug, the mack-daddy, the baddest brother up from the housing projects of the statistics profession.  He runs this town tonight, and for the future.

Silver interprets polls and statistics unlike any other writer out there.

Traditional journalists on television, radio, and print have a need to hype as much as to inform.  Columnist Peggy Noonan absolutely predicted the future when she wrote – before the first Presidential debate – that Romney would be declared the winner, if only because the media needs a horse race.  Traditional media has advertising space to sell, which means emphasizing outlier polls showing a tight race.  Or it means national polls – which are largely meaningless in an electoral college world – get hyped beyond their true meaning.

But Silver consistently brings a probabilistic, nuanced, and data-oriented approach to predicting the Presidential outcome, and why it may hinge on Ohio.  He incorporates the information from political betting markets in a sophisticated way.

His writing reminds me of working with the brightest traders in the bond markets, sifting through data and models to come up with probabilistic scenarios.

What’s so amazing about Silver is how rare he is in journalism.  He relies not on anecdote but on data.  He’s willing to debunk myths and de-hype a situation, if the data warrants it.  Why can’t we get more of this?

It’s a Nate Silver world now, and we just live in it.

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Life After Debt Part III – Check out the “Where Are They Now?” File

After discussing in Part I the Bizarro World of government debt and the Part II Weapons of Mass Financial Destruction, in Part III we check in on the people currently residing in the “Where Are They Now” file.

One through-the-looking glass aspect of the never-published ‘Life After Debt’ Treasury Memo is the cast of Treasury department characters copied on it and expected to weigh in on the impending problem of Treasury surplus.  The key players today have really not changed since the end of the Clinton administration.  To wit:

Larry Summers – Was Secretary of the Treasury under Clinton in 2000.  Most recently served as and then stepped down from the post of White House Director of the National Economic Council under President Obama.

Doug Elmendorf – Was Deputy Assistant Secretary for Economic Policy under Clinton in 2000.  Currently head of the Congressional Budget Office during the Obama administration, the non-partisan office responsible for producing all Federal fiscal and financial projections, upon which deficit and budget planning is made.

Gary Gensler – Was Undersecretary for Domestic Finance in the Clinton administration in 2000.  Currently the Chair of the Commodities Futures Trading Commission (CFTC) the primary regulator of commodities trading.  (The same CFTC that recently slapped Barclays with $200 million worth of the total $453 million fine for Libor rigging)

Lee Sachs – Was Assistant Secretary to the Treasury for Financial Markets.  Counselor to Treasury Secretary Geithner in 2009 and 2010, now resigned from that post.

Martin N. Baily – Now is a Senior Fellow at the Brookings Institute, and author with Doug Elmendorf of an explanation of the 2008 credit crunch titled “The Great Credit Squeeze.”

What does it mean that the same team under Clinton immediately went to work for the Obama administration?

On the one hand we can take comfort in the idea of expertise and experience in wielding economic power, influence, and decision making.  Twelve years after serving under Clinton, the band is largely back together and continuing to guide the economic ship.  This is not surprising and in fact has been a hallmark of Obama’s economic and financial policy.  While he occasionally nods to his base with a reference to greedy bankers or sympathizes with the concerns of ‘Occupy Wall Street,’ Obama’s actions — caution and continuity with both the Clinton and the W. Bush administrations — speak loudest.

On the other hand, I get the awful feeling, and I’m not the only one, that keeping intact the same team from twelve years ago almost ensures that we will not get a critical review or substantive critique of what went on before.

Let’s be real here: From the surpluses predicted as far as the eye can see in 2000, to the deficits as far as the eye can see in 2011, big fiscal mistakes have been made.  Financial opportunities were blown.  Debts have ballooned for which future generations will be paying taxes.  Very few of us actually made those decisions that led to the national debts.  This happened under Clinton, W. Bush, and Obama.  Changing an administration periodically offers our system a chance to respond to mistakes, to reach new conclusions based on new data.  But if you bring substantially the same people back, you might not only make the same mistakes, you’ll likely get a high degree of ass-covering that impedes progress.

Summers gets blamed publically, probably rightly, for making too many choices to protect his legacy of economic leadership.  But it is worth noting that the ‘Where are they now” file is full of the same people now in the Obama White House with their fingerprints on this Clinton era Treasury memo.

The memo offers a pointed reminder that we almost had it made in 2000 but circumstances, and yes, people, failed to protect our national credit.  But since we’ve got the same people still in charge, can we expect better decisions and better results in the future?

 

See Next Post “Life After Debt IV: Another Bizarro World Villain

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