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Obama’s 529 U-Turn Reveals the Budget Truth that Democrats Know But Avoid
The Obama White House’s decision to abandon its controversial plan to, as the New York Times puts it, “effectively end the popular college savings accounts known as 529s” is what the left likes to call a “teachable moment.” For middle-income America, it should again teach (a) Democrats don’t really believe all tax hikes should be borne by the 1-2%, and (b) Democrat’s long-term budget plan is to pay for an ever-expanding welfare state though some sort of massive middle-class tax hike. I think the Wall Street Journal editorial page gets this one correct:
It’s a shame there won’t be a vote, because the 529 tax increase is a rare example of the President’s policy sincerity. Liberals sooner or later must raise taxes on the middle class because taxing the rich alone can’t possibly finance all of the Democratic Party’s entitlement schemes. The middle class is where the real money is. So while taxing 529s may die for now, it’s only a matter of time before liberals are back with a carbon tax or value-added tax or something. That’s the real meaning of “middle-class economics.”
Right, Democrats will eventually have to admit that raising taxes on high-income earners and business, while of course necessary, is insufficient. At some point, middle-class families will have to start sending bigger checks to Uncle Sam. In 2013, the NYT’s editorial board admitted that a main reason for Obama’s continued demand for higher taxes on the rich is that such increases “are a necessary precondition to what in time will have to be tax increases on the middle class.”
Indeed, recall that back in 2009, Democrats, such as House Speaker Nancy Pelosi and former Clinton chief of staff John Podesta, openly spoke about the need for a value-added tax to pay for Obamacare. Former Clinton administration Deputy Treasury Secretary Roger Altman helpfully suggested an opening bid of $400 billion a year.
If Obama ever offered a multi-decade budget the way Paul Ryan has, the “tax the rich” charade would become transparent. You would either see ridiculously high taxes on the rich and business, a VAT on everyone, or massive budget deficits. A 2011 plan from the left-wing Economic Policy Institute had all of the above: 2035 revenues at 24% of GDP (vs. a postwar average of 17%), nearly 4% annual deficits, and a debt-GDP ratio higher than today. Among its tax hikes: a 5.4% “millionaire’s” surcharge, taxing capital gains and dividends as ordinary income, enacting a carbon tax or a cap-and-trade program, instituting a financial transaction tax, taxes on beverages sweetened with sugar or high-fructose corn syrup. As you can see, the plan would end up taxing everyone. Despite all those taxes, you could argue the plan really needed even more to make fiscal sense.
Let me end by repeating this analysis by Lane Kenworthy, an academic who favors the US going the full Sweden and raising total US federal spending by about 10 percentage points, or $1.5 trillion:
As a technical matter, revising the U.S. tax code to raise the additional funds would be relatively simple. The first and most important step would be to introduce a national consumption tax in the form of a value-added tax (VAT), which the government would levy on goods and services at each stage of their production and distribution. … Relying heavily on a consumption tax is anathema to some progressives, who believe additional tax revenues should come mainly — perhaps entirely — from the wealthiest households. Washington, however, cannot realistically squeeze an additional ten percent of GDP in tax revenues solely from those at the top, even though the well-off are receiving a steadily larger share of the country’s pretax income.
It’s the truth everyone in Washington knows, even progressive Democrats. Oh, and if Republicans want to avoid a giant VAT, they better get serious about entitlement reform. And even then US tax burden will probably need to creep above its historical average — which is even true in the Ryan plan. Keeping that increase to minimum will take hard work, and the sooner the better.
Published in General
I agree that the middle class absolutely needs to bear a higher (relative) share of the tax burden. But neither side is willing to face reality.
The post does a good job of describing the Democrats’ strategy of front-loading the liberal goodies while downplaying the inevitable middle-class tax hikes which will be sprung once it’s too late.
But I find intellectual honesty also somewhat lacking on the right (Ryan and a few others excepted). While it is encouraging that most on the right agree that taxation needs to become less progressive (“broaden the base”), there still seems to be a pipe dream that we can cut spending low enough such that most individuals’ actual tax burdens would have to rise.
While certainly a very laudable goal, it is also politically and economically unfeasible. The only realistic solution is for the middle class to pay more in absolute taxes AND to cut discretionary spending AND to reform entitlements.
Is this mean to imply that completely avoiding some VAT is likely impossible?
I will give the European states credit for this much — they at least accept that the only way to afford cradle-to-grave government care is through massive taxes. Americans on the other hand want their universal pre-K, government subsidized college, Medicare, Medicaid, and Social Security while assuming that “someone else” — richer, younger, healthier — will be able to pay for it.
You can’t keep a welfare program running where everyone gets more out than they put in, the way that Social Security worked for the first seventy years and the way that Medicare still works. Your only options are to cut benefits, increase revenue, borrow heavily (which only increases costs over the long run), and/or inflate the currency (which effectively cuts benefits).
I should add that I’m all in favor of tax simplification reform, even reform that slightly increases the tax burden, because the tax preparation industry functions as an additional tax and useless drain on the economy.
A fine explanation, James, and thanks. Mendel, I agree with you: conservatives who refuse to admit that real, honest-to-God budget cuts are going to be incredibly painful, to some people, regions and industries, in some cases too painful for conservatives to fully implement.
At this point I no longer listen to so-called leaders who insist we can stay on Easy Street with all the programs we like, while knocking down all the ones we don’t. Our causes too will take a bigger bite, like DoD. It’s already taking a hit, of course. Well, either it takes an even bigger hit, or taxes go up.
Just to give some numbers … 2012 is the most current year I can find … From IRS data on tax returns received:
If you confiscated ALL of the income earned over the 1 million dollar threshold you’d get 1.38 trillion dollars. 2012 total federal government spending was 3.6 trillion dollars. So. If you took every nickle earned over 1MM. Wages, salaries, bonuses, dividends, capital gains … Everything over 1MM you could run the federal government for about 4.5 months. From Jan 1 until about May 20th or so.
And despite progressive’s wet dreams, this is a trick you could only do once. So the revenues this scheme would yield in year 2 would be damn near zero.
I’m sorry to be harsh, but this is yet another in the endless examples of just why the GOP is a shuttering miserable failure of a political party.
Summing up, the left wants to raise taxes on Republican voters with great enthusiasm, the GOP wants to raise taxes on Republican voters reluctantly.
But we deserve it, because we’re such terrible greedy leeches that we don’t want to pay for all the leftist welfare programs that we fought against, don’t want, or can’t benefit from.
And about that subsidized college- I suspect everyone has heard the axiom if you subsidize something you get more of it. The government has been lavishly subsidizing college tuition increases, with ruinous results. This is no small thing, yet I’ve heard precious little about it from the party that supposedly represents opposition to the left.
I also heard precious little about reforming medicare and medicaid, back before Obamacare made it moot. This program, by the way, is a huge tax increase upon middle class voters who tend to vote Republican, a tax increase with which the GOP seems to have no trouble at all.
What I do see are endless attacks upon conservatives who are fed up with the endless failures of the Republican party, and as here, demands that Republican voters pay higher taxes to fund the welfare state.
Pitiful.
Unless you plan on implementing a new revenue stream like a VAT, you’re not necessarily going to bring in more revenue by raising rates or eliminating certain deductions. Income tax revenues, as a % of GDP, have fluctuated within a fairly small range over the last 60+ years. Somewhere around 17.5% give or take depending on the strength of the economy at the moment. Think of all the various tax laws/rates that have changed over the decades, yet revenues depend almost entirely on a growing or shrinking private economy.
So no, I don’t accept that my marginal rate needs to go up to close our budget deficit. What I do accept is that benefits to all classes and demographics need real, year over year cuts.
Great points, all. The 529 flap illustrates the way both parties are pressured to make decisions that increase the deficit but not to shrink it. Repeat this over the whole federal budget (when we have one), and you get ruinous deficits, even in relatively prosperous years. We need a fundamental reform that creates a large and powerful constituency for responsible government for the whole nation- one that come overcome the politicians’ impulse to buy the support of every campaign contributor.
The only way to keep taxes reasonable is to control spending. The only way to control spending is to have an actual budget. The only way to control the budget is to have a solid majority of voters feel pleasure when Congress creates a good budget and pain when Congress creates a poor one. We need a broad, flat tax with a rate that is automatically adjusted to pay for budgeted spending. The current mess shows that politicians respond to pressure. We just need to place some pressure in the right place.
If the Republicans had any guts, they should write the law taxing 529’s, vote it out of the House committee, then subject the entire House to a vote. Do it in a couple of days. Would any Democrats vote for it? It would prove the Republican’s willingness to work with the President! /s