Fiscal Policy, Double Taxation, and (Im)Morality

Since my specialty in economics is fiscal policy, I’m used to wonky (and perhaps boring) debates about topics such as marginal tax rates, Keynesianism, and the Armey-Rahn Curve.

But there’s also a moral component to fiscal policy.

Though immoral might be a better word. That’s because some of our friends on the left actually think that all money belongs to the government.

As such, they think that it is a “subsidy” if we are allowed to keep any of our earnings.

If you think I’m exaggerating, let’s look at some excerpts from a column in the New York Times by Ron Lieber. He starts by equating Biden’s student loan bailout with a provision in the tax code.

For months now, we’ve been in a nationwide debate over whether we should cancel up to $20,000 in student loan debt for tens of millions of people. …But hiding in plain sight is another federal program — 529 college savings plans — that offers the biggest benefits to wealthy families. …With some careful planning, no taxes will come due for most people as long as future generations use the money to pay for college…, graduate school…and any other related educational costs.

Mr. Lieber wants people to think these two policies (the student loan bailout and the tax provision) are both ways of giving benefits to people.

But there’s a big moral difference.

Student loans take money from taxpayers and gives the funds to other people (the real beneficiaries are college administrators rather than students, but that a topic for another day).

By contrast, Section 529 accounts allow people to keep their own money.

Here are some further excerpts from the column.

In 2015, President Obama proposed taxing future earnings in 529 accounts. The blowback from the upper middle class was so severe — and from Democrats and Republicans alike — that he rescinded the plan in the same month that he introduced it. …we did not, as a nation, feel the need to call on The Supremes to weigh in on the legality of maintaining tax-favored savings for millions of people who could afford many college educations anyway. We just canceled the cancellation of their sweet, juicy subsidy without a vote in Congress or a trial. …it is the wealthy who have the best opportunity to extract the largest breaks from the federal government when it comes to saving and paying for college. 

I’m not surprised Obama was on the wrong side, but let’s ignore that and instead focus on Lieber’s assertion that Section 529 accounts are a “sweet, juicy subsidy.”

As already noted, I don’t think it’s right to say it’s a subsidy when people get to keep their own money. That’s reminiscent of the offensive “tax expenditure” term used by some of the people in Washington.

But it is true that some provisions of the tax code create distortions and should be eliminated as part of tax reform.

However, Section 529 accounts are not loopholes. They are simply ways for people to save and invest without being subject to double taxation. Very similar to IRAs and 401(k)s.

And eliminating all forms of double taxation should be a top goal if we want fundamental tax reform.

The bottom line is that folks on the left are wrong about IRAs and 401(k)s and they are wrong about Section 529 accounts.

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Image credit: 401(K) 2012 | CC BY-SA 2.0.