http://www.politico.com/story/2015/01/barack-obama-tax-plan-114367.html?cmpid=sf5 things about Barack Obama’s Robin Hood tax plan
The proposal faces long odds in the GOP-controlled Congress.
By BRIAN FALER 1/18/15 7:22 PM EST
President Barack Obama would take from the rich and give to everyone else as part of a sweeping tax plan he intends to push Tuesday in his State of the Union address.
The Robin Hood-style proposal would raise taxes on capital gains and various breaks for the wealthy in order to finance more generous education, family and retirement benefits for those further down the income ladder.
“By ensuring those at the top pay their fair share in taxes, the president’s plan responsibly pays for investments we need to help middle-class families,” the administration says in a summary. It faces long odds in the Republican-controlled Congress, where lawmakers have bitterly complained about a string of recent tax increases on the wealthy.
Here are five things to know about Obama’s tax plan.
CAPITAL GAINS: The administration wants to increase the top rate to 28 percent, from the current rate of about 25 percent with various surcharges, while expanding the number of things that would be subject to it. It would do that by cracking down on what’s known as a “stepped-up basis.”
Here’s how it works: If you sell stock for $1 million that you bought for $100,000, you pay capital gains taxes on the $900,000 profit. But if you die, and your kid gets the stock, he or she is excused from paying taxes on the $900,000. For your child, the new starting point in calculating capital gains taxes is the $1 million, so that $900,000 escapes taxation. It’s a tax break that mostly, though not exclusively, benefits the wealthy. According to the Congressional Budget Office, the provision cost the Treasury about $50 billion in 2013, and 21 percent of the tax benefits went to the top 1 percent.
The administration’s plan would end the stepped-up basis “loophole,” though it would add various provisions aimed at shielding the non-wealthy and small businesses from having to pay the tax.
It would be the latest in a string of increases in capital gains taxes under Obama. Lawmakers agreed to raise the top rate to 20 percent for wealthy taxpayers, from 15 percent as part of the 2013 fiscal-cliff agreement, while also imposing a surtax on known as “Pease” that can add another percentage point in taxes. The Affordable Care Act, meanwhile, was financed in part by a new 3.8 percent investment tax, which together raise the current cumulative top capital gains rate to 25 percent.
The administration notes that a 28 percent rate would match the levy under President Ronald Reagan, though the top income tax back then was 28 percent, while income taxes currently top out at 39.6 percent, not including various surcharges. So under Obama’s plan, capital gains taxes would almost double from 2012.
EXPAND MIDDLE- AND LOW-INCOME FAMILY TAX CREDITS: The administration’s plan would expand the child tax credit, the earned income tax credit for low-income workers and create a new $500 “second-earner credit.” The new provision is aimed at married couples, particularly those with young children, who may feel it doesn’t make economic sense for both to work.
“When both spouses work, the family incurs additional costs in the form of commuting costs, professional expenses, child care and, increasingly, elder care,” the administration says. “When layered on top of other costs, including federal and state taxes, these work-related costs can contribute to a sense that work isn’t worth it.”
The credit would phase out with income, though couples earning up to $210,000 could claim at least a portion of the break.
Other provisions boost the maximum child tax credit to $3,000 from the current $1,000, while expanding the EITC for childless workers.
Republicans have long had a love-hate relationship with the EITC, in particular, but both became politically toxic for them in the wake of Obama’s November executive order on immigration. That’s because illegal immigrants can currently claim the child tax credit while, under Obama’s immigration initiative, they may be able to claim the EITC as well. Both are refundable, which means if the credits exceed someone’s tax bill, they can receive a check from the government for the difference. Republicans balked at a $400 billion tax deal in November in part after the administration demanded expansions in the two credits. Republicans feared it would look like they were expanding government benefits to illegal immigrants.
EDUCATION BREAKS: The administration wants to extend the American Opportunity Tax Credit, the administration’s signature higher-education tax benefit that’s due to expire at the end of 2017, while making it more valuable to low-income students. Obama also wants to fix an issue where those who join a government program that forgives student loan debt after borrowers make payments for 20 years can be socked with unexpected — and big — tax bills. That’s because the IRS considers forgiven debt to be equivalent to income, and taxes it. Under the administration’s plan that would end. Other parts of the administration’s plan would exempt Pell grants, which go to students from low-income families, from taxation.
The administration proposes to finance the breaks at least in part by taking away education breaks for the well off. Details are thin, but the administration says it would “limit upside-down education savings incentives” by rolling back 529 education tax breaks created by President George W. Bush and repeal incentives for the Coverdell education savings program.
THE MITT ROMNEY LOOPHOLE: The administration’s plan would target those who accumulate giant balances in tax-preferred retirement accounts, an issue that came into the spotlight in 2012 after reports that then-Republican presidential candidate Mitt Romney had at least $21 million in an IRA while working at Bain Capital.
“Tax-preferred retirement plans are intended to help working families save for retirement,” the administration says.
It would bar contributions to tax-preferred accounts once balances reach about $3.4 million, which the administration says is enough to provide $210,000 in annual income. At the same time, the administration would expand tax breaks for small businesses that automatically enroll their employees in retirement savings accounts.
BANK TAX: The plan would impose a seven basis point fee on the nation’s approximately 100 biggest banks. The administration says it would force them to think twice about borrowing heavily.
“The president’s proposal 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, which would in turn help reduce the probability of major defaults,” the summary reads.
The administration says it is “broadly consistent” with an excise tax former Republican Ways and Means Chairman Dave Camp (R-Mich.) would have imposed as part of a tax reform bill last year. Camp’s plan was rejected by his fellow Republicans.
