By James Kwak
This week I returned to one of my favorite topics: raising taxes, particularly on the rich. First I wrote an article for Medium about the single most obvious change that should be made to the tax code: eliminating the step-up in basis at death for capital gains taxes. If you’re not sure what step-up in basis means, or why it’s a ridiculous idea, you should read the article.
Then today I wrote an article for the Atlantic about why (a) killing 529 plans was a great idea in President Obama’s latest tax proposals and (b) why 529 plans are impossible to kill. Here’s the crux of the matter:
“If you’re poor, a 529 plan gives you nothing, since you don’t pay income taxes; the American Opportunity Tax Credit gives you $4,000 ($5,000 under Obama’s proposal) because you can take $1,000 of the credit per year even if you pay no taxes. If you’re in the ‘middle class’ (making at least $74,900 and able to save $3,000 per year per child), a 529 plan gives you $5,800; the AOTC gives you $10,000 ($12,500 under Obama’s proposal). If you’re in the upper class, a 529 plan gives you $26,300; the AOTC gives you nothing. Do I even need to write the rest of this article?”
My editor took out that last sentence, but I liked it so much I’m putting it back here. (Those number are based on some basic scenarios I described in the article.)
Every politician likes to say that he is in favor of simplifying the tax code, eliminating tax breaks for people who don’t need them, and helping the middle class. Only it just isn’t true.