In the State of the Union address, President Obama announced a proposal to tax earnings in 529 plans, the state-supported investment vehicles that offer (currently) tax-sheltered and tax-advantaged college savings. Our phone conversations, email exchanges, and meetings over the following few days were filled with back-and-forth about the wisdom, and lack thereof, of the plan, and with questions about AEDI's stance on that kind of policy change.
Some assumed that we'd be for it, since 529s are overwhelmingly used by wealthy households, and we certainly support policies that would facilitate wealth transfer (we even have an AEDI project on Wealth Transfer!).
Others assumed that we'd be opposed, because we generally are against anything that could reduce asset accumulation, particularly for higher education.
Our friend and colleague at New America, Justin King's, take most closely aligns with our own: 529s are, right now, largely a tool for people who would have saved for college anyway, and a way for them to receive (often-considerable) subsidies to do so, BUT, that doesn't mean that they can't become the architecture for a far more inclusive approach to college savings, or that it's ever okay to do anything that could send the message to would-be college savers that that might not be in their long-term interest.
As we reflect on that flurry over those few days (Justin links in his piece to many of the prominent articles on one side or the other) today, as we approach Tax Day tomorrow, we're thinking about what lessons that proposal, and the mini-storm it provoked, hold for what should be a fervent aim of tax reform: the effort to use tax policy as a lever of greater equity and a catalyst of increased economic mobility.
Because 529s are not the only tool, currently used primarily by the wealthy, that could be repurposed to build wealth among those without. Employer-based retirement plans have similar potential, although somewhat less because they are, by definition, limited to those with jobs, as do any tax credits that aren't currently refundable but could be. Taxing wealth in order to constrain inequality and to increase the government's fiscal capacity for progressive measures is, in AEDI's assessment, a good thing. Taxing wealth-producing vehicles that could be transformed into significant asset-building opportunities for those currently denied them...not so much.
Perhaps, instead of focusing on which savings vehicles should be taxed because they are primarily used by wealthy people, we need to change that equation itself, by building the incentives and supports that would dramatically increase the wealth holdings of disadvantaged Americans into such structures, so that these utilization patterns are altered. In other words, maybe the first question isn't, what should we tax because it's a place where mostly rich people benefit, but, instead, what could we do so that those who aren't rich benefit here too? A lot?
Of course, as Justin's article underscores, this may well be a case when patience is no virtue. If we ignore disparate participation in these institutions, hoping that, someday, we'll be able to equitably retrofit them, the wealth gap will only grow, and we'll miss valuable opportunities to equalize outcomes and recoup revenues where we should. The potential for inclusion is some distance from its actuality, and low-income Americans need wealth building today, not at some undefined moment in the future.
And this is where much of the debate over Obama's proposal on 529s missed the mark, and what we're still thinking about today. Instead of pretending that 529s are tools for the middle-class--because they're not, yet--or maligning them as evil oppressors, we need to be asking, "How are these particular savings instruments illustrative of one of the great problems in today's America: the failure of current institutions to facilitate equitable asset development among low- and moderate-income households? And what would it take to change that?"
That equity should be the measure of any tax reform proposal. If 529s' potential to foster equitable asset development does not materialize, Obama's approach might make sense. Certainly, if changing the tax consequences of 529s could extend meaningful opportunities for low-income families to save for their children's higher educations--in 529s or elsewhere--such an approach might be more appealing. We welcomed the debate, back in January, and we embrace it again as we approach April 15th. Not every idea is a good one, but it's never a bad time to think about how we can harness the tremendous power of the tax code as a real force for economic justice.