Obama to throw down the gauntlet in support of middle class
—Updated
Free community college, an expansive broadband initiative, and a national effort on paid family leave
– are there any other major proposals President Obama has in mind for
his State of the Union address tomorrow? Actually, yes, and it’s
arguably the biggest component of progressive governance yet.
Suzy Khimm reported over the weekend on the president’s proposal for tax reform, which Republicans really aren’t going to like.
Democrats have offered one proposal after another to tax the wealthy to benefit ordinary Americans. But Obama’s new tax plan takes a more targeted approach: He wants to raise taxes on the richest Americans’ inherited wealth, not income, to help the middle-class build their own wealth.Obama’s plan, unveiled on Saturday night, would eliminate a loophole that allows wealthy Americans to pass on tax-free assets to their heirs. He would raise the capital gains tax for those with incomes above $500,000 from 23.8% to 28% and eliminate a loophole used by a handful of wealthy individuals – including Mitt Romney – to turn tax-preferred retirement plans into tax shelters.
One can see the evolution in the White House’s thinking in
recent years. After Obama’s inauguration in 2009, the first goal was an
immediate rescue of the nation’s economy, which ended the Great
Recession. From there the president wanted to establish a foundation of
economic security for Americans, which he did through the creation of
the Affordable Care Act.
But as has been widely documented, the growing wealth gap and
stagnant middle-class incomes remain persistent national challenges,
which in turn leads Obama to this next phase of his economic platform –
ensuring prosperity that’s more broadly shared.
Some of you are probably thinking this latest pitch isn’t
entirely new. After all, tax reform has been on the table for a while,
and middle-class tax breaks have already been a major part of the
president’s agenda.
But this really is new.
For example, Democrats in recent years have eyed most tax
increases on the highest incomes as a way of reducing the deficit
(which, incidentally, has worked quite effectively). But the point of
Obama’s new proposal is clearly different – he wants to boost
middle-class incomes, not cut the deficit even more – and the mechanisms
are entirely different.
How so? The plan ignores income taxes and envisions tax
reforms that target specific kinds of wealth, raising top long-term
capital gains and creating a tax on large banks’ borrowing.
If such a policy were created, the increased revenue would
pay for a package of new tax cuts intended to put more money in
working-class pockets, including an expanded Earned Income Tax Credit
and child tax credit.
Or put another way, President Obama has apparently decided
the deficit has already shrunk, and unemployment has already fallen, and
it’s time to start addressing income inequalities in a more direct way.
Perhaps the most politically interesting aspect of the White
House’s plan is its proposed changes to retirement accounts. Matt
Yglesias had a good piece on this.
IRAs, 401(k)s, and other tax-advantaged retirement accounts are supposed to encourage people to save by offering preferential tax treatment to money placed in the accounts. But retirement accounts are typically set up through employers, and administering them isn’t free. Consequently, many smaller firms don’t offer retirement plans and many firms try to avoid offering them to part-time workers.Obama’s plan would require all companies with at least 10 workers to automatically enroll their employees in an IRA program (employees could subsequently opt-out) and provide money for small businesses to defray the administrative costs. It would also require employers to make retirement programs available to long-term part-time staff.Conversely, Obama wants to limit the ability of extremely wealthy individuals to take advantage of these accounts. Mitt Romney, for example, had over $100 million in his IRA in 2012. In theory, people are only allowed to contribute $5,500 per year to an IRA, so amassing that level of wealth requires either stupendous good luck or else some kind of shenanigans involving deliberate undervaluing of the assets you put in your account. Rather than undertake the complicated task of trying to police those shenanigans, Obama is proposing a simple hard cap of $3.4 million in an IRA.
Will a right-wing Congress even read the president’s plan? Of course not.
Since the White House released the blueprint on Saturday, Republican
reactions have ranged from “hell no” to angry guttural sounds from GOP
lawmakers too enraged to enunciate.
That said, Obama’s proposal put Republicans in an awkward position: they have no credible ideas for improving middle-class wages; they’ll have to make the case against generous middle-class tax breaks; and the entire debate positions Democrats on the side of popular economic populism in advance of next year’s elections.
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