The White House is right: Abandoning President Barack Obama’s proposal to end the tax exemption for some college savings accounts doesn’t much affect the budget. But his reversal in the face of widespread criticism matters a lot from another perspective: It demonstrates the shallowness of the inequality conversation.
The debate over 529 accounts, which allow families to avoid paying income taxes on money they save for higher education, revolved around the degree to which those accounts disproportionately benefit the wealthy. People who supported ending the tax break pointed out that the median income of families who use it is three times that of families that don’t.
Opponents responded that while about half of families with 529 accounts in 2010 made more than $150,000, about one-third of families that used the plans made less than $100,000.
Either way, the program disproportionately benefits the well-off. The only question is how much. (And that’s leaving aside the wisdom of measuring the tax break’s impact by the distribution of participation rates, rather than of actual tax savings, which skew far more heavily toward the very wealthy.)
There’s a deeper argument here: How can we expect to fight inequality if we’re unwilling to close loopholes that tilt toward the wealthy? If this program was too dear to the hearts of the upper middle class to consider cutting, can anyone name one that isn’t? And what good is talking about inequality if we won’t surrender programs that exacerbate it?
A more constructive use of the 529 debate would be to see it as a challenge over how to improve the financial status of the median American. Here’s one number to start with: Median U.S. household income in 2013 was $52,250.
From the perspective of somebody in that household wondering how to put a kid through college, the debate over whether somebody earning $150,000 a year is wealthy or just upper middle class is probably beside the point. And Obama’s proposals for better tax incentives aimed at lower-income households probably look pretty reasonable.
Wealthier Americans might not disagree. In fact, the most charitable interpretation of the 529 debate is that upper- middle-class households didn’t believe that Obama would pair closing those loopholes with other tax incentives that would spread those benefits more evenly. In this regard, it may be fair to fault Obama for not making that more explicit. But it’s not clear just how much that would have mattered.