Ahead of President Obama's State of the Union (SOTU) Address, the Administration has unveiled a fact sheet detailing some of the revisions to the tax system that he will discuss during the speech. The White House claims that the proposals would raise $320 billion in revenue over the next ten years, most of which would fall on higher-income Americans and large financial institutions.
The marquee proposals include:
- Closing the "trust fund loophole". The White House claims that this provision in the current tax system allows wealthy Americans to pass on inheritances without paying their "fair share", putting a greater burden on middle-class taxpayers.
- Increasing the capital gains tax. The highest capital gains tax rate would be set at 28 percent under the President's plan, the same as it was during President Reagan's administration.
- Levying a 0.07 percent fee on large financial institution's liabilities (not assets). The fee is touted as a disincentive to invest heavily in volatile financial tools that the White House claims puts the broader economy at risk. It would apply to institutions with more than $50 billion in total assets.
All told, new taxes and loophole revisions would generate about $220 billion over the next ten years, while the new bank fee would bring in another $110 billion in that same time. President Obama has proposed using those funds to finance several new programs and tax credits aimed at lower- and middle-income earners. Some of these include:
- "Free" community college. The White House claims this proposal, which would cover two years' worth of tuition expenses for qualified recipients, will cost $60 billion over ten years. NTUF's Demian Brady determined it could cost up to $7.992 billion in the first year alone.
- Expanding the Earned Income Tax Credit (EITC). The Joint Committee on Taxation (JCT) determined that allowing childless workers to claim the refundable credit, as the President has supported, would cost $47.118 billion over the next ten years. This money is not foregone revenue -- it is spending triggered by sending checks to millions of Americans that exceed their tax liabilities. He has also supported offering more benefits to families with more than three children, would increase spending by about $14.129 billion.
- Making the American Opportunity Tax Credit (AOTC) permanent. The refundable AOTC is set to expire in 2017, but the President's plan would permanently extend it, which would cost $41.597 billion according to JCT.
- Adjust Child and Dependent Care tax credits. In order to "improve child care quality, access, and affordability for working families", the President has proposed to expand refundable benefits offered through the Child and Dependent Care Tax Credit. That would cost another $4.539 billion.
All told, White House officials expect to spend $175 billion -- or 54.7 percent -- of the $320 billion in new revenue on these tax benefits.
However, while the President cites historical precedent and "fairness" as reasons to enact these reforms, there are some key issues for taxpayers and legislators to ponder when considering them.
First, just because the capital gains tax was set to 28 percent during the Reagan Administration doesn't mean that it was an effective policy move. In fact, capital gains realizations in the wake of the Tax Reform Act of 1986 were reduced by half, which meant that even though a higher rate was in place -- in that case, one that was eight percent higher than in previous years -- there was actually a smaller base to tax.
Second, while the Reagan-era tax reforms did raise the capital gains rate, it also saw tax rates on ordinary income cut significantly. If the President were to mirror those reforms as well, he would have to cut the top marginal rate down to 28 percent and make major simplifications of the tax base (such as restoring full deductions for upper-income earners).
The White House fact sheet is quick to support raising rates for wealthy taxpayers, but makes no mention of any reductions to payroll or excise taxes -- which would, arguably, have a much greater impact on middle-class Americans in need of "fair" tax reform.