On Friday, Megan McArdle opinioned on Obama’s proposal to tax 529 college savings plans in the same manner as 401(k) plans — that is by taxing the money as ordinary income when it’s withdrawn. Today, Glen Reynolds has a column in the USA Today that he’s touting, which observes that this is a “double-whammy, [because] those withdrawals will show up as income on parents’ income tax forms, which are used to calculate financial aid, making them look richer, and hence reducing grants.”
McArdle positions this as “scraping the bottom of the barrel” and an indicator that the administration has run out of low-hanging fruit in its quest to raise taxes without seeming to go after its favored groups.
But the administration claims that they’re focusing on 529 plans because, in their number-crunching, only the rich really benefit to any great degree. Now, it may be true that the rich benefit disproportionately, because they are more likely to save, and, with their higher marginal tax rate, they receive greater benefits. But it is still a tool that benefits the middle class, and offers tax-advantaged savings to anyone who, well, pays taxes.
But, to a certain degree, you have to take them at their word. Eliminating the tax break, or even reducing it to only defer taxes, will seriously curtail the attractiveness of these plans, especially because the plans are restricted enough already, requiring investment in state-sponsored funds rather than, as with an IRA, the fund of one’s choice. What the administration is effectively communicating is either “we don’t believe middle-class families are saving for college” or “middle-class families who are saving for college, shouldn’t bother” — or both.
Now, my earliest understanding of money management came from my parents, and went something like this: “yes, your friends are going to Disney for vacation, but we’re saving, and that’s better,” followed by gripes that my aunt and uncle hadn’t saved and were taking advantage by getting financial aid that they didn’t deserve. So maybe those lost trips to Disney color my perspective.
But still: I don’t see another way to read the administration’s proposal other than an abandonment of the idea that families should save for their children’s college, rather than relying on government giveaways, loans, and loan forgiveness afterwards.
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