Hey Obama: Don't Tell Us It's Raining While You Soak Middle-Class Savings!


In USA Today, Glenn Reynolds of Instapundt explains one of the most predictable and awful political plays that always happens when government needs more money: Taxing the middle class.

Of course, the government—in this case, President Obama—never puts it that way. It's always talking about going after the Thurston Howells and Richie Riches of the world. But when it rains on the wealthy, the middle class get soaked, because they ultimately have the sorts of assests and savings that can actually be taxed en masse. In his State of the Union Address, Obama hinted at the outlines of his plan to go after college savings in tax-advantaged accounts known as 529s.

When a government is desperate for cash, it goes after the middle class, because that's where the money is….

Though millions of Americans have been putting money into "tax free" 529 plans to save for their children's increasingly expensive college educations, President Obama would change the law so that withdrawals from the plans to fund college would be taxed as ordinary income. So while you used to be able to get a nice tax benefit by saving for college, now you'll be shelling out to Uncle Sam every time you withdraw to pay for Junior's dorm fees.

This doesn't hurt the very rich — who just pay for college out of pocket — or the poor, who get financial aid, but it's pretty rough on the middle– and upper–middle class. In a double-whammy, those withdrawals will show up as income on parents' income tax forms, which are used to calculate financial aid, making them look richer, and hencereducing grants.

Likewise, Obama proposes to tax the appreciation on inherited homes.

Reynolds notes that a GOP Congress won't let Obama's plan to tax 529s (or much of anything else) happen on their watch. That's good, but the GOP has its own problems, which inlcudes wanting to cut taxes without addressing spending (they did exactly this during the first six years under George W. Bush, where they jacked spending while goosing spending up the yinyang).

Related (and cited by Reynolds): Bloomberg's Megan McArdle worries that Roth IRAs are the next savings vehicle Obama will go after.