President Obama will propose a slate of tax changes including assistance targeted to middle-class families and college students and stiffer tax treatment for wealthy heirs and megabanks. A few numbers help illuminate his choice of policies to prioritize, and also reveal points where the scope of an economic problem is larger than what the White House is proposing to do about it.
$10,000 a year — The average annual cost of childcare for an infant is almost $10,000, and the price tag can be as high as $16,430 in some parts of the country. For a family of three living in poverty, childcare for a single infant would cost more than half of their total household earnings. Childcare and education now make up 18 percent of what it costs to raise a child, but accounted for just 2 percent of the cost of parenting in 1960. The high cost of childcare keeps many parents at home who might otherwise be working, but for the many families who do not have the luxury of keeping one parent at home the consequences can be downright disastrous. In the past year, moms like Shanesha Taylor and Debra Harrell have made headlines for being sent to jail over dire parenting choices that their economic situation imposed upon them. Decades of research on working mothers have found that children’s outcomes aren’t any worse if their mom works rather than staying at home, and wealthier households produce higher-achieving kids, so anything that can make it easier for parents to go to work is likely a good thing.
Increased tax credits for childcare will obviously help parents who pay someone to look after their kids. But at the maximum value of $3,000 per child, Obama’s proposed credit lands far short of the total costs those parents face, which generally exceed $10,000 per year and are the single biggest expense that the typical family faces in most parts of America. Sequestration and other budget fights have sliced childcare funding for low-income families, and extra money back on their taxes won’t restore Head Start slots that disappeared in recent years thanks to budget cuts.
And subsidizing the cost of private child care does little to address the broader flaws in the marketplace for childcare. Childcare workers have seen their wages rise by just 1 percent since the late 1990s, according to the National Child Care Staffing Study, and most workers in the industry face dire economic circumstances in their own lives as a result.
$76,000,000,000 — That’s how much the six biggest financial companies made in 2013, after expenses. The financial industry as a whole has returned to record profits just a short time after bottoming out and dragging the rest of the economy down with it. One of Obama’s key tax increase proposals would target the biggest companies in the industry for a levy that the administration hopes is small enough to be politically palatable but large enough to change how banking giants behave. The proposal would charge 7 cents for every $100 in debt that a financial giant borrows. Only the 100 or so companies with $50 billion or more in assets would face the new tax. An administration fact sheet says the tax “would attach a cost to leverage for the largest financial firms, leading them to make decisions more consistent with the economy-wide effects of their actions,” thus reducing the risk of another debt-fueled financial catastrophe that spills over into other economic sectors.
Since the difference between profitability and disaster in financial deals is often minuscule, a 7-cents-per-hundred-bucks tax could certainly be large enough to alter how banks do business. But that doesn’t mean that the change would make the industry more conscientious, as the administration hopes. Making it more expensive for banks to borrow will make them less likely to finance projects with debt, which helps make the overall financial system more stable. But it also means some beneficial deals don’t get done that otherwise would. And it does nothing to address the broader culture of rulebreaking and impunity on Wall Street fostered by decades of deregulation and abetted the Obama administration’s failure to provide stiff punishment for financial industry abuses.
$644,000,000,000 — That’s how much American taxpayers will lose over the coming decade to just one loophole in the tax code’s treatment of inherited wealth. Current tax rules for investments that a person inherits mean that heirs pay far lower capital gains taxes. The “step-up in basis” rule, which Obama will propose to change on Tuesday night, means that tax officials only charge heirs based on how much an asset they inherited has gone up in value compared to the day their benefactor died. If a child inherits property that her father bought for $10 but which is now worth $100, then sells it for $105, she only has to pay capital gains taxes on the last $5 of gains. The other $90 never gets taxed under the current rules. Because investment wealth is concentrated among the richest Americans, the vast majority of the benefits from the step-up in basis rule goes to people who are already very rich. Half of that $644 billion will go to people who are already in the richest 5 percent of the country, and just 18 percent of it will go to families in the bottom 60 percent.
After exemptions for people of more moderate means, Obama’s proposal for reforming capital gains taxes on inherited wealth would almost exclusively affect the top 1 percent. Together with a proposal to change retirement account rules that allow wealthy people to use their retirement savings as a tax shelter, the capital gains changes would do a great deal to restrict the hyper-rich’s ability to cheat the taxman and ensure their lineage never needs to lift a finger. But those are just two of the several swindles that wealthy estate planners use to shield their fortunes from the public and deprive the country of revenue that could otherwise support the sorts of services and investments required to restore the middle class’s share of American prosperity. Others, such as the so-called “Walton GRAT,” keep the taxman away from hundreds of billions more in inherited wealth.
2,600,000 people — More than 2.6 million Americans are currently in default on their student loans, according to Department of Education data. While education experts take heart that the default rate is finally dropping after years of increases in the wake of the recession, a system of higher education financing that leaves millions of its customers so unable to keep up with their payments that they default is failing by almost any definition. To try to stem the tide, Obama is proposing to consolidate several tax credits that don’t do as much as they should to help people go to college. The savings from ending those credits would be invested in making his signature American Opportunity Tax Credit (AOTC) permanent and more generous. The administration points to a Government Accountability Office finding that one in seven families that are eligible for higher-ed tax credits don’t take them, and one in four families that do take the credits could have gotten more money if they’d chosen a different set of options from the complicated menu of college tax credit programs. Obama will also propose tax fixes for Pell Grant recipients and people who use income-based repayment rules to get out from under huge student debt loads, and talk more about his recently unveiled plan to make community college free for many students.
The magnitude of the failures of the current system for financing higher education may be too large for tax fixes to address. Students owe well over a trillion dollars in combined debt payments, and the effective default rate provides an even bleaker picture than the official Department of Education statistics. Critics who sprung out of the Occupy Wall Street movement are hoping to organize student debtors and begin collective resistance actions such as debt strikes, in the hope of forcing a far more radical change to how America pays for willing, capable citizens to get advanced education. Instead of tweaking the details of the current system where individuals must take on massive debts just to obtain a credential that may or may not provide a high enough wage to repay the debt, these radical critics argue that a new system is needed.
$6,600,000,000,000 — Americans of working age have $6.6 trillion less saved for retirement than they will need to maintain their current standard of living after they stop working. That’s a gap equivalent to more than a third of the entire U.S. economy. To address the retirement crisis, Obama will propose tax incentives to encourage all businesses to provide their workers with retirement savings accounts. The proposal includes tax credits for small businesses that set up retirement savings systems for workers or make their existing systems easier to use, and it also requires all employers that provide such accounts to make them available to part-time workers who have put in at least 3 years with the company. The administration hopes the changes will open up savings options for 30 million workers who can’t currently save for retirement through their job.
The proposal is consistent with last year’s “myRA” initiative from the White House. Both are intended to remove barriers to saving for people who aren’t doing enough to prepare for retirement, but neither is nearly ambitious enough to tackle the impending crisis. Both policies rely upon the individual 401(k)-style investment accounts that have replaced pensions as the primary means of saving for retirement, but that system contains deep-seeded flaws that harm even those workers who do save aggressively. Sen. Elizabeth Warren (D-MA) and other progressives have proposed a simpler, grander approach to that crisis: boosting Social Security benefits.