Obama’s Answer to the ‘Rich Tax’

President Barack Obama announced his plans to strengthen the middle class by raising taxes on the rich on Jan. 20 (local time). During the live broadcast of the State of the Union, he revealed the direction he will take for the remaining two years of his presidency, striking the Republican-controlled House and Senate directly. He plans to secure $320 billion for child care and education by raising taxes on the rich for next 10 years. Republicans immediately rejected the proposal, making any bills suggesting a tax raise impassable, but Obama’s proposal of “helping the middle class” will surely drag the Republicans down on their way to the election of November 2016. At the same time, it will help the Democrats solidify their image as the “party of the middle class.”

President Obama’s proposal is simple. If a couple’s combined yearly income is more than $500,000, the capital income tax will increase to 28 percent from the current rate of 23.8 percent. It will also close the loopholes in inheritance tax systems, in addition to the 0.07 percent tax on the debts of financial companies whose asset values are over $50 billion — which will raise the $320 billion in the next 10 years. The capital income tax rate was 15 percent when President Obama first took the office, but it was raised to 20 percent, and increased again to 23.8 percent after “Obamacare” was introduced. If the capital income tax rate becomes 28 percent as in President Obama’s proposal, it will have doubled since his election. The White House, however, does not consider this an anomaly, pointing out that even during the Republican Reagan administration, the capital income tax rate was 28 percent.

The gist of the proposal lies in the inheritance tax reform. Due to the loopholes in the related tax laws, the amount of money that vanishes through capital income tax was astronomical. For example, if “Person A” purchased a stock whose values increased from $100,000 to $1 million, according to the current tax law — which has the same starting point of calculation for capital income tax as inheritance tax — the child of “A” only has to pay the tax for the $100,000.* This is because the inherited $1 million is considered newly acquired “capital,” not inheritance. Therefore, the tax on $900,000 is effectively exempted. Closing such loopholes is the focus of his proposal. In fact, according to the Congressional Budget Office, almost $50 billion in capital income tax was not collected in 2013 alone due to the loophole in the inheritance tax system.

President Obama’s decision to raise taxes on the rich comes as the result of the growing gap between income levels. Currently, America’s annual average income is, based on purchasing power, not even $34,000. On the other hand, the wealthiest 1 percent of households in America have an average income of more than $1.1 million. Over the last five years, that 1 percent of the American population was responsible for the 90 percent of the total gross domestic product increase, and 90 percent of the population was responsible for the remaining 10 percent of the GDP increase. The 400 richest people in America now have more money than the poorest 150 million people combined. In addition to that, the wealthiest 5 percent of Americans hold two-thirds of the entire American stock market.

President Obama set out to reduce the income gap by aiding the middle class. The White House announced that only the top 1 percent whose yearly income is over $2 million will see their taxes rise through the increased capital gains income tax and the reformed inheritance tax. If everything goes according to plan, 99 percent of the population will not have their taxes increased; in fact, they will have more government support. The support for the working couple is also noticeable in his proposal; for them, a $500 tax credit will be given during year-end settlements. Additionally, parents with children younger than five will receive a maximum tax exemption of $3,000 per child instead of current exemption of $1,000. Workers will receive a maximum of one week paid sick leave, and additional investments of $600 million will be made to the community colleges, making them free.

Obama’s Political Game in “Rich Tax”

President Obama made it clear in his State of the Union that he will support the middle class economy. He used the word “middle class” seven times, “working class” nine times, “family” 16 times, and “economy” 29 times. He said, “Will we accept an economy where only a few of us do spectacularly well? Or will we commit ourselves to an economy that generates rising incomes and chances for everyone who makes the effort?” The Republican Party, from the national leadership to its members, criticized the plan, arguing that more taxes on capital gains will discourage investors and hinder economic growth.

Of course, without Republican support, any tax bills will not be able to pass Congress. Yet, President Obama went on with announcing his tax plans. To this, Republican Sen. Mike Lee, in an interview with The New York Times,** said, “For him, it’s all 2016 partisan politics now, and Republicans shouldn’t waste time debating the merits of the president’s political talking points.” Marc Thiessen, a known right-wing columnist of The Washington Post, pointed out that “… Obama’s move is completely and transparently political.”

Nevertheless, the Republican Party cannot ignore his move, no matter how much it looks like bait, entirely. They have been struggling to shed their “rich and powerful” image. Some members even support a bill that would reduce the taxes on the low-income class. Jeb Bush, the former governor of Florida and a prominent Republican candidate for the next presidential election, and Mitt Romney, the former Republican presidential candidate, have pointed to the income gap as a serious problem before. Yet, most Republicans are strongly opposed to the idea of supporting the middle class though tax increases on the rich — the very reason why the Republicans cannot shed the image of “defenders of the rich and powerful.”

There are also analyses that what the Obama administration and the Democrats are aiming for is indeed the Republicans’ “Achilles’ heel.” If the hypocrisy of the Republicans — who claim to work for the middle class, yet only act to defend the rich — can be emphasized, the Democrats will be able to hold the high ground during the 2016 presidential election. In actuality, President Obama was able to defeat Mitt Romney via the income gap debate during his 2012 re-election campaign. Harvard University Professor Robert Putman, in an interview with the AP, said that “[i]nequality — and especially the growing opportunity gap — have become the top litmus test of the seriousness for 2016.” He noted that “[t]he entry ticket for the presidential sweepstakes is that you have a policy — some policy — for dealing with this issue.” It is no coincidence that right after the State of the Union, Hillary Clinton, a prominent Democratic candidate for the 2016 election, said that the address “pointed [the] way to an economy that works for all.”

*Translator’s Note: There is a typo in the original source. It says “… only has to pay the tax for the $1 million.”

**Translator’s Note: Not an actual interview. This is from the tea party response to the State of the Union.