Economy

What You Need To Know About Obama’s Proposal To Tax The Rich

CREDIT: AP Photo/Jacquelyn Martin

During his annual State of the Union address this week, President Obama will reveal a tax proposal that administration officials say aims to slow down the power shift from poor to rich and give average families the resources they need.

Even amid post-recession job growth, little has changed in many American households, particularly those in the middle-class, many of which have made the same as, if not less than, the average family toward the end of the 20th century.

The current economic landscape has been decades in the making: within a 30-year span, the top 1 percent of families saw their real after-tax income more than double while families in the middle 60 percent saw an increase of less than 40 percent. Within that time span, technology slowly replaced human labor and American workers had to compete with cheaper overseas labor. Concurrently, the number of workers represented by unions dropped by 9 percentage points and the wealthiest Americans started paying some of the lowest tax rates in the country, even as salaries for those on Main Street stalled. Wage slowdown in tandem with a decline in educational attainment has perpetuated conspicuously inequality in the years after the 2008 recession that keeps the 1 percent wealthy and more than 9 million full-time workers in poverty.

Here are some highlights from the president’s plan:

Raising the Capital Gains Tax

Senior administration officials said that President Obama will call for raising the rates on capital gains -– which include profits from the sale of stocks, bonds, and real estate, on top income owners and eliminating a tax break on inheritances. Capital gain tax rates under President Clinton and President Bush had been cut so that the richest Americans pay considerably less than their middle-class counterparts. Under Obama, the rate rose from 15 percent to more than 23 percent. While conservative lawmakers have argued that the tax breaks allow entrepreneurs to trickle the wealth down to the lower class, data shows that more than 80 percent of capital tax income realized goes to 5 percent of people, a reality that has compelled even Warren Buffet to speak in support of tax increases for the top 1 percent.

Fees on U.S. Financial Firms

Under Obama’s tax plan, more than 100 of U.S. financial institutions with assets of more than $50 billion would be required to pay a fee equal to at least .15 percent of their covered liabilities. The Obama administration estimated that the fee would raise more than $59 billion over the next ten years. While some GOP opposition is expected, administration officials said the fee bill bears a similarity to a proposal from former Republican Rep. Dave Camp (MI), who served as chairman of the House’s Ways and Means Committee.

Assistance for Working Spouses

Revenue from the tax increases would fund credits of up to $500 for families in which both spouses work. Under Obama’s tax plan, nearly 24 million couples with annual income up to $210,000 could benefit from the tax credits.

Expanding Childcare Tax Credit

The cost of childcare and education counts as a middle-class family’s second highest cost. According to data compiled by the U.S. Department of Agriculture, a middle-class family who had a child in 2013 could expect to spend more than $300,000 between the child’s birth to his or her 18th birthday. Obama’s tax plan will offer families some relief to families with the expansion of the child care tax credit to up to $3,000 per child under the age of five. Administration officials say that this provision would help more than 5 million families decrease their child care costs for more than 6.7 million children.

Overhauling the Education Tax System

Under Obama’s proposal, six tax provisons would be consolidated into two and students would receive up to $2,500 a year to complete their degrees. Administration officials said this provision could cut taxes for more than 8.5 million people. It would also simplify taxes for more than 25 million families who claim education tax benefits. This part of the tax plan comes on the heels of another proposal the president announced earlier this month that would make community college free for full-time and part-time students who maintain a GPA of 2.5 or higher.