The American approach to helping middle class always seems to help the rich more

When the Obama Administration announced plans to begin taxing future withdrawals from 529 college savings plans, those in favor played up the fact that 70% of all tax savings benefits from 529 plans go to families with more than $200,000 a year in income. The opponents of taking away this tax benefit to pay for other proposed educational reforms quickly pointed out that 70% of all 529 accounts belong to households with income under $150,000. Those opposed to reducing the tax benefit won the battle.

No one was asking why 529 plans are even necessary. The answer to that question is that the cost of going to college has risen precipitously over the past 25 years to the point that, without some assistance, large numbers of families can’t afford to send their children to college. The overwhelmingly most important reason for this rise in the cost of a college education is the withdrawal of federal and state support of higher education, starting in the Reagan years.

It’s a familiar pattern: A benefit meant to help the middle class address a financial challenge ends up helping the wealthy more. Most IRA money is in the accounts of people with the highest incomes. Remember that IRAs first came into existence under Reagan in 1981 as an alternative to traditional defined benefit pensions plans. In this case, it was the private sector retreating from its support of the middle class and poor—who primarily work for others—that led to the new need.

We see a similar pattern with the mortgage deduction. It used to be that all personal interest was deductible, but when Congress limited the interest deduction to home mortgages in 1986, again under Reagan, our leaders said it was to help keep home-owning more affordable. Again, even though affordability is not an issue to the wealthy, they are the ones to have benefited because they have larger mortgages. Politicians and pundits now associate the mortgage deduction with the middle class, but it’s the wealthy who benefit more.

It’s not just that the wealthy can deduct more from income because of these “middle class” deductions. It’s also the case that every dollar a wealthy person deducts is worth more in real money that isn’t taken away in taxes because the wealthy pay at a higher rate. These deductions may also drive other income below the threshold at which a higher taxation rate takes effect, thereby putting even more money in the pockets of the wealthy.

There are only three ways that government can address the lost revenue from a tax deduction:

  • Increase the deficit
  • Cut programs
  • Increase taxes on someone else

For most of the past 35 years, the federal government has preferred to increase the debt and cut programs. The net effect has been one more way of shifting income from the poor and middle class to the wealthy.

Thus we see time and time again over the past 35 years an institutional propensity to increase inequality of wealth in the United States, similar to the institutional racism that used to exist for decades throughout the country and still exists in the criminal justice system. Take something away from the middle class and poor, then give them a way to finance their new costs that ends up providing even greater benefits to the wealthy, who don’t really need the additional help. It’s a complicated shell game that has made a contribution to the dramatic increase in inequality of wealth and income in the United States over the past 35 years.

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