Home >News >World >Obama proposes tax increases on wealthy to aid middle class

Washington: President Barack Obama is proposing new taxes on the wealthiest Americans that would limit their profits from investments and make it harder for them to pass assets to heirs.

Obama, who will promote the plan during his 20 January State of the Union Address, will use much of the proceeds—$320 billion over 10 years—to expand tax credits for higher education and child care and create a new break for two-earner couples. The White House released details of the plan Saturday.

“What you’re seeing here is really dedicated middle-class tax relief to really get at that problem of middle-class wage stagnation," said Harry Stein, director of fiscal policy at the Center for American Progress, a Washington group aligned with Democrats.

Obama’s tax plan faces opposition in the Republican-controlled Congress, where lawmakers want to cut tax rates and curtail targeted breaks. The two parties agree more on business tax changes, though an accord on that isn’t close.

“Slapping American small businesses, savers and investors with more tax hikes only negates the benefits of the tax policies that have been successful in helping to expand the economy, promote savings, and create jobs," Republican Orrin Hatch, the chairman of the Senate Finance Committee, said in a statement Saturday. “The president needs to stop listening to his liberal allies who want to raise taxes at all costs and start working with Congress to fix our broken tax code."

Two-year agenda

The president’s address is intended to lay out an agenda for his final two years in office and help the Democratic Party retain the White House in the 2016 election with a legacy of policies that appeal to middle- and lower-income voters, who continued to lose ground as the economy rebounded from the recession.

He would increase the top tax rate on capital gains and dividends to 28 percent from 23.8 percent. The rate was 15 percent when Obama took office in 2009, meaning that he’s proposing to almost double it over his two terms in office.

He would also impose capital-gains taxes on asset transfers at death, ending what the White House calls “the largest capital gains loophole." Under current law, assets held until death aren’t subject to those levies, creating an incentive for wealthy people to hold onto them. Heirs only have to pay capital-gains taxes when they sell and only on the value above what the assets were worth at death.

Speech preview

Obama has been previewing his proposals over the past 10 days in speeches around the country. In addition to the tax plan, he said he will push Congress for legislation allowing workers to earn seven days of paid sick leave per year and make community college free for millions of students, at a cost of $60 billion over 10 years.

Obama, who has consistently advocated for tax increases on the wealthy and tax cuts for middle-income families, is offering more of both in the tax plan released Saturday. He is layering new proposals on top of others that Congress has ignored or rejected.

Spokesmen for House Speaker John Boehner and Senate Majority Leader Mitch McConnell both criticized the plan.

‘Outdated code’

“Republicans believe we should simplify America’s outdated tax code," said Don Stewart, deputy chief of staff for McConnell. “Tax reform should create jobs for families, not the IRS."

The administration’s proposal on capital gains at death would exempt the first $200,000 in capital gains per couple plus $500,000 for a home, along with all personal property except for valuable art and collectibles. The rest would be treated for income-tax purposes as if it had been sold.

The plan would also delay taxes on “inherited small, family-owned and operated businesses" until the business is sold and let any closely held businesses spread the taxes over 15 years.

According to the White House, 99 percent of the tax burden from the capital-gains proposals would be paid by the top 1 percent of households, and more than 80 percent would be paid by the top 0.1 percent.

People with significant amounts of unrealized gains include founders of successful businesses and others who inherited businesses decades ago.

More Owed

Even with the limits, the changes would create new tax burdens for some families that are exempt from the estate tax under laws Obama signed, which limited the tax to couples worth more than $10.86 million.

As a simplified example, consider a couple who died with $5 million in assets, including $2.5 million in stock with a basis of $500,000. Under current law, they could pass that to their children with no taxes. Under Obama’s plan, they could owe about $500,000.

The White House dubbed the break the “trust fund loophole," though it is used by people without trust funds.

“That’s an extremely powerful planning tool," Stein said. And you can still access income from unrealized capital gains’’ with loans.

Obama is also renewing and expanding an earlier proposal for a fee on the liabilities of about 100 financial institutions with assets exceeding $50 billion.

Expanded Breaks

This year’s version is a seven-basis-point fee on their total liabilities and would raise an estimated $110 billion over a decade. The new version of the tax has a lower rate, a broader base and would raise about twice as much money as before.

It would apply not just to bank holding companies and the narrower set of financial institutions included in last year’s plan. Instead, it would now affect asset managers and insurance companies, said a senior administration official, who spoke on condition of anonymity to describe the plans before the speech.

Obama would use the proceeds from the tax increases to expand breaks for lower-income and middle-income families.

In 2007, when Obama started running for president, the middle 20% of households had an effective federal tax rate of 14.4 percent and the top 1 percent paid 27.4%, according to the Tax Policy Centre. By 2014, the middle-class rate had declined to 13.7%—it was lower during the recession—while the wealthiest were paying 33.4 percent.

Child care

The newest part of that plan is a $500 tax credit for married couples when both spouses work, an attempt to combat the reluctance of lower-earning spouses to work because their income is taxed at marginal rates for the combined couple.

The full tax credit would be available for couples with incomes up to $120,000 and those earning up to $210,000 would get a partial credit.

Obama would also triple the maximum tax credit for child care to up to $3,000 for children under 5. The government would effectively pay half of the first $6,000 of child care per child for some families. The maximum credit could be claimed by families making as much as $120,000.

Neither the second-earner credit nor the child-care credit would be refundable, the official said, meaning that they would only benefit families with income-tax liability.

As part of those changes, Obama would repeal flexible spending accounts for child care, which let people set aside up to $5,000 a year before taxes. Because those function like deductions, the accounts are more valuable to families with higher incomes and marginal rates.

Retirement plans

Obama would also consolidate several education tax breaks into a single tax credit worth up to $2,500. Part-time students would be eligible for a partial credit.

He is also proposing to end taxation of some student loan debt forgiven under income-based repayment plans. To help pay for that, Obama would repeal the deductibility of student loan interest for new borrowers.

The plan announced Saturday also continues two past Obama ideas on retirement policy. He wants to require companies to automatically enroll workers in individual retirement accounts. And he wants to limit contributions to tax-advantaged retirement accounts for people who have about $3.4 million in them.

Some of those ideas—the bank fee, consolidating education credits and breaks for two-income households—have had bipartisan support, with differences on the details.

Even so, most of them are unlikely to advance in a Republican-controlled Congress.

Push, shove

Representative Paul Ryan of Wisconsin, who is chairman of the House Ways and Means Committee, told reporters Jan. 15 that Republicans wouldn’t be able to undertake the “full-throttle tax reform" they wanted to pursue because of Obama’s opposition to cutting marginal tax rates for individuals.

Senator John Thune, a South Dakota Republican, said Republicans were interested in making the biggest tax code changes since 1986 and are looking to Obama to work with them.

“So far what we’ve seen is the White House and the president have expressed interest rhetorically in the issue of tax reform," he said at the party’s retreat Jan. 15 in Hershey, Pennsylvania. “But when push comes to shove, really engaging the Congress -- we’ve not seen that."

Following his State of the Union speech, Obama plans to promote the initiatives in two Republican-dominated states, Idaho and Kansas. He’ll speak at Boise State University on Jan. 21 and at the University of Kansas in Lawrence the next day. Bloomberg

Billy House in Hershey, Pennsylvania contributed to this story.

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