Question

an article in the newyork times on president obama's unsuccessful attempt to eliminate tax benefits for college savings accounts notes "in theory, tax reform is supposed to be built around cutting back preferences like these, in order to pay for some combination of lower tax rates and tax preferences aimed at people with lower incomes. the writer concludes that in practice, tax reform is difficult to enact. briefly explain why it may be difficult politically to eliminate tax preference for some groups in order to improve the efficiency of the tax code by reducing general tax rates

Answer 1

Article link is : https://www.nytimes.com/2015/01/29/upshot/why-obamas-proposal-for-529s-had-no-chance.html

By Josh Barro dated 30th Jan 2015.

This article discusses Obama govt. attempt to end the tax benefits for college savings accounts because families with healthy income were mainly using this to avoid tax payments. Hence this head of college savings account is being misused.

Tax reforms make sure that rich are taxed appropriately so that poor will not be charged unfairly through regressive taxes. Hence it is written that "in theory, tax reform is supposed to be built around cutting back preferences like these, in order to pay for some combination of lower tax rates and tax preferences aimed at people with lower incomes. "

Now question remains, why it may be difficult politically to eliminate tax preference for some groups :

1. High bargaining power in elections of above median income (making $150,000 to $225,000 ) and wanting tax benefits.

2. Govt. wants to increase tax base by putting tax on these people but they resist it highly saying that certain investments are in merit goods (like education).

3. Govt. may provide alternates to current tax system but people resist as having cash in bank account gives more satisfaction. Like in this case, govt. was thinking to give tax credit on tuition fees so that only 'real' people will be taking it.This will increase tax base and collect more taxes and poor may be charged less.