U.S. President Barack Obama pauses while speaking about college cost initiatives during a visit to Pellissippi State College in Knoxville, Tennessee, Jan. 9, 2015.
Kevin Lamarque/Reuters

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.
 

Barack Obama, State of the Union, Tax Policy and Tax Reform

Obama to throw down the gauntlet in support of middle class

Updated