The Corner

The 529 Backdown

Liberalism needs to raise middle-class taxes, and it can’t. I wrote about this right after the fiscal-cliff deal in 2013.

Regardless of what politicians have been saying in public, everyone who has looked at the budget projections for the next few decades understands that, absent a sudden reduction in Americans’ life expectancy or other shocking development, middle-class -benefits are going to have to be cut, middle-class taxes are going to have to be raised, or both. The war between liberals and conservatives over the future of the welfare state is largely a matter of how much of each will be done. Conservatives think that it would be better to cut middle-class benefits than to raise middle-class taxes: that we should not take more out of people’s paychecks in order to give them more when they retire. Liberals would rather raise middle-class taxes than cut middle-class -bene-fits, a policy that reduces risks by setting a higher floor in retirement for everyone.

During the fiscal cliff debate, as in previous battles in that war, Republicans pointed out that the government cannot realistically make up much of its long-term financing gap by raising taxes on the rich. A tax-heavy solution to that gap will eventually have to rely on much higher taxes on the middle class. That’s how they finance large welfare states in other developed countries. European social democracies don’t generally have much higher taxes on corporations or high earners than the United States. The chief difference between their tax policies and ours is that they levy value-added taxes that hit consumption.

The fact that George W. Bush’s tax cuts were set to expire at the end of 2012, right after the reelection of President Obama, offered liberalism its best chance in decades for a large tax increase on the middle class. Democrats could not take the opportunity for two reasons. As Keynesians, they worried that the sudden imposition of higher taxes on the middle class in a time of economic weakness would cause another recession. As politicians, they knew that middle-class tax increases are deeply unpopular. . . .

Avoiding blame for middle-class tax increases served the short-term political interests of both -parties; avoiding higher middle-class taxes themselves served the long-term ideological interests of only the Republicans. And the course of the debate over the fiscal cliff has reinforced the bipartisan taboo on openly raising middle-class taxes, a taboo that has persisted ever since Walter Mondale campaigned on tax increases in 1984 and lost 49 states. The only middle-class tax increase of any note to pass in recent years was Obamacare’s individual mandate, which had to be marketed as something other than a tax. Making matters worse for liberals, the political system has adopted a very broad definition of the middle class, one that includes, in the most recent deal, all couples making less than $450,000 a year.

President Obama’s plan to raise taxes on 529 plans lasted about a week before being brought down by, among others, House minority leader Nancy Pelosi. Liberals want extra revenue, but getting it from large-scale or even medium-scale tax increases on the middle class seem to be out of their reach. And shielding savings from overtaxation through dedicated accounts (IRAs, 529s) appears to be a good strategy for continuing to thwart them.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.


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