Obama's Failure to Kill 529 Plans May Say Less About Tax Reform Than You Think

By :: January 30th, 2015

After President Obama proposed, and rapidly abandoned, a plan to curb the tax advantages of Sec. 529 college savings accounts, several wise observers, including my friend David Wessel at Brookings, saw an object lesson for broad-based tax reform. To wit: If lawmakers can’t ditch a single $1 billion tax break, how could they possibly agree to a full-blown rewrite that would eliminate scores of far more popular subsidies in return for lower tax rates?

Actually, they could. The experience of the 1986 Tax Reform and, in a different way, of the immortal ever-expiring tax provisions dubbed The Extenders shows us how.

Picking off tax subsidies one-at-a-time is a fool’s game. But paradoxically, killing scores of tax breaks at once, either directly or by capping their value across-the-board, may be easier—especially if they are dumped in exchange for a tangible, easily understood benefit such as lowering tax rates. Politicians from Barack Obama to Mitt Romney have suggested such caps. So has economist Martin Feldstein. My Tax Policy Center colleagues Bob Williams, Eric Toder, Joe Rosenberg, and Dan Baneman explored several of these options back in 2012.

We saw one form of this strategy work in 1986. Tax reformers, starting with President Reagan, began the exercise by setting specific rate targets and agreeing that reform would have to raise as much money as the old tax law. Then, they proposed wiping out vast acres of tax breaks to achieve those goals.

Lobbyists who wanted to save their favored tax breaks had only two options. They could try to kill someone's favorite tax break to save their own. Or they had to convince lawmakers to raise rates above those initial targets. If keeping a tax subsidy could be specifically linked to, say, a one percentage point increase in rates, advocates would have to defend that higher rate. In a very transparent way, tens of millions of taxpayers could see their rates rise to protect some special interest.

And it worked. Reagan’s initial rates did not hold, but neither did they break. In the end, Congress substantially lowered rates even as it eliminated many, if not all, subsidies.

The extenders story sends the same message, but from a negative experience. Each time these subsidies are up for renewal, lobbyists, like endangered musk-oxen, form a tight circle to protect one another. As long as they stay together, it is impossible for lawmakers to pick off any single subsidy, no matter how weak on the merits. And it is easy for them to stick together as long as voters see no explicit benefit to dumping any one tax expenditure.

Voters need to understand, in the most transparent way, that there is a price for preserving junk subsidies. They need to see “what’s in it for me.”

Sadly, deficit reduction—the payoff for killing the extenders-- is not a popular reward. Rate cuts, on the other hand, may be more enticing.

That brings us back to Obama’s aborted attempt to curb 529s. There was a trade-off. Taken together, all Obama’s education reforms would have helped most families. But they never knew it. How could they? In his haste to retreat, Obama made no effort to explain it.

That too would not happen if a president fully engaged in big tax reform.

Let me be clear: Tax reform isn’t going to happen any time soon, for lots of reasons. And David and others are right to say that the demise of Obama’s plan to cut 529s reflects the lack of serious interest in reform by most lawmakers today. But the survival of these education subsidies does not mean that a rate-cuts-for-base-broadening swap will never be possible. It may mean that lawmakers need to be even more aggressive when it comes to killing off special interest tax breaks.

 

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The Other Gambling Line on Super Bowl Sunday

By :: January 30th, 2015

Pop-quiz: What’s the line on Sunday’s game between the New England Patriots and Seattle Seahawks? Answer: The Patriots are favored by one or two points (depending on what sportsbook you bet with). Next question: On what line do taxpayers report gambling winnings on their 1040 income tax form? Answer: Line 21 for “other income.” On […]

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Spending Caps? What Spending Caps?

By :: January 30th, 2015

Up next week: The President’s Budget. President Obama will release his budget  for fiscal year 2016 on Monday. The plan would increase spending above the sequester limits of  the Budget Control Act of 2011. Steep cuts were triggered in 2013 when Congress failed to reach a budget deal, but were then temporarily suspended thanks to […]

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“Money Is Like Manure… Not Worth a Thing Unless It’s Spread Around.”

By :: January 29th, 2015

TPC shows how President Obama would redistribute income from the rich to the poor. The President will release his budget next week, and with it, a tax plan analyzed by the Tax Policy Center. TPC’s Howard Gleckman explains that under the plan, after- tax income would increase by about $175 in 2016 for households making […]

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Is Obama Closing Retirement Savings Loopholes or Just Curbing Congress’ Generosity?

By :: January 28th, 2015

In his upcoming budget, President Obama will propose to strip away the “loopholes” that permit wealthy individuals to accumulate large amounts in tax-favored retirement plans. He would prohibit a taxpayer from contributing any more to IRAs or other qualified retirement plans once his or her accounts reach a combined value of $3.4 million. For sure, […]

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How Obama’s Tax Plan Will Redistribute Income from the Very Rich To The Poor

By :: January 28th, 2015

President Obama’s latest tax package, which he’ll unveil in detail next week along with his new budget, would lower taxes for low-income households and significantly raise taxes for the highest income 1 percent—those making $663,000 or more, according to new Tax Policy Center estimates.  Middle-income households would see relatively modest changes in their tax bills. […]

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If You Tax It Will They Change?

By :: January 28th, 2015

“There’s no tax-driven move in baseball!” At least not for ace starting pitcher Max Scherzer. He recently signed to play for the Washington Nationals for $210 million and there’s been speculation that DC’s tax laws helped seal the deal. TPC’s Richard Auxier reminds us that taxes are a little like curveballs: They are not always […]

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Pitching, Defense, and State Tax Policy

By :: January 27th, 2015

The Washington Nationals’ signing of Max Scherzer—one of the best starting pitchers in baseball—ignited a few sports-talk debates: Do the Nationals have the best rotation in the history of the game? Can DC win its first World Series title since 1924? Did the District’s tax laws help land the prized free agent? Okay, maybe “SportsCenter” […]

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New Evidence on Our Fiscal Status

By :: January 27th, 2015

CBO’s  new budget projections are an opportunity to take stock of the country’s fiscal situation. At the risk of oversimplifying, the report contains one piece of good news, and two of bad news.  The bottom line: The sky is not falling but policymakers have fallen short of solving the long-term fiscal problem. The good news […]

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Who Deserves a [Tax] Break Today?

By :: January 27th, 2015

Is dynamic scoring ready for prime time? At a TPC-Hutchins Center program yesterday, backers and critics debated whether congressional scorekeepers should include  macroeconomic effects of tax changes when doing a budget score. They disagreed, of course, but did agree that if the tool is used, it ought to be limited to a few big bills […]

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