What the 529 savings fiasco reveals about the Obama coalition
This does not bode well for tax reform
A lot of Democrats, even the ones who know better, like to think their party has the best interests of the aspirational lower middle class at heart. And while Democrats favor income redistribution, a large social safety net, and higher income tax rates for the wealthy, they have a hard time translating those ideals into hard policy.
One reason is that the Democrats depend for their financing almost as much on the rich as Republicans do, and there's nothing inherent in being a Democrat that prevents those rich people from trying to make sure Democrats safeguard their financial interests. Sometimes, the party's leadership overcomes this tension — the financial reforms enacted as part of the Dodd Frank bill are one example — but just as often, the party caves.
During his State of the Union address, President Obama said he wanted to get rid of a popular tax deduction for so-called 529 tuition savings accounts, replacing it with a tax credit that would benefit more people. It seems like an easy call; families with incomes above $150,000 have opened the majority of the accounts, according to The Atlantic, and 70 percent of them are held by the top 4 percent of earners.
But a funny thing happened on the way to the forum. It turns out that a lot of those account holders are supporters of Obama's who make a distinction between income tax and the service accounts they use to fund their childrens' increasingly expensive educations. Obama's argument that the proposal would simplify the tax code and encourage savings fell on the deaf ears of parents who wanted to know why they were being penalized for the high cost of college, having already been encouraged to start the accounts under the premise that the deduction would last forever.
National Journal's Josh Kraushaar noticed that the main beneficiaries of the 529 deduction seem to be upper middle class voters with education, and that the Democratic members of Congress who lobbied against Obama's proposal represent a lot of them.
In 2008, Obama was the first Democratic presidential candidate in decades to win the vote of upper-middle-class Americans (those making a family income of $100,000 or more). Bill Clinton carried just 34 percent of those voters in his successful 1992 campaign; Obama improved on that total by 15 points in 2008.
It's no coincidence, then, that the Democratic leaders who reportedly lobbied Obama to drop the proposal represent two of the most affluent districts in the country. House Minority Leader Nancy Pelosi's San Francisco seat is the 37th wealthiest in the country, while Budget Committee ranking Democrat Chris Van Hollen's suburban Washington district is in the top 10.
Their districts are filled with constituents — both middle- and upper-class — who have utilized the 529 college accounts to save for their children's tuition. These days, sending a student to a top-tier private university can cost more than $200,000 for four years. Unless you're one of the top 1 percent, that's an economic burden that even the well-off can't afford without help. [National Journal]
There are several lessons from the White House climbdown. One is that tax benefits, once established, are hard to get rid of. It follows that tax reform, something a majority of voters in both political parties support, will be complicated by the politics of envy. Simplification and wealth redistribution — the essence of this proposal — often go hand-in-hand.
Obama's coalition, most of which will become Hillary Clinton's political coalition, includes an awful lot of upper middle class voters who won't be amenable to structural reforms that might cause them to pay more money.