With median household incomes down by $4,500 since 2007, President Obama has responded with a proposal that would lower taxes on the working and middle classes, giving them additional take-home pay to cover the mortgage, buy food and clothing and cover other expenses. It would also make it easier to pay for higher education.
The tax cuts would be financed by closing loopholes and raising taxes on the wealthy**, who have done quite well in recent years, and by assessing fees on the kind of risky investments by big banks that helped cause the economic meltdown of 2008. That would not only generate new revenue, it would reduce the economic incentive to take such risky gambles.
Obama's proposal will be the centerpiece of the State of the Union speech that he will give tonight. Not surprisingly, it has drawn a stunned, angry reaction from Washington Republicans. They've condemned it as a partisan stunt, an effort to redistribute income and as a means to frustrate their own quite-different plans for tax reform.
Truth is, they're right: The Obama plan is undoubtedly all three of those things. The administration knows that its plan has no chance of becoming law in a Congress controlled by Republicans. However, it has offered the proposal as a way to create a contrast with tax-reform plans that U.S. Rep. Paul Ryan and others have promised to advance.
That contrast is indeed telling. For several years now, the Republican House has approved tax-reform plans that would cut the tax rate paid by the wealthiest Americans from 39.6 percent to 25 percent. Those plans -- drafted by U.S. Rep. Paul Ryan and others -- would also cut the top corporate tax rate from 35 percent to 25 percent and eliminate taxes on overseas profits.
However, because Ryan pledges to keep the system revenue-neutral, every dollar in tax reduction for corporations and those in the top brackets would have to be made up by someone else. And who would that "someone else" be?
Got a mirror?
The Tax Policy Center, which analyzed the Ryan proposal, calls it "essentially, an effort to have low- and middle-class households bear the entire burden of closing the fiscal gap and bear the costs of financing an additional tax cut for high income households."
So what we've got is a curious dichotomy, at least as the GOP is attempting to define it:
- If you propose to lower taxes on the wealthy while raising them on everybody else -- if you in effect use the guise of tax reform to redistribute income UP the economic ladder -- that is deemed pro-American, patriotic and capitalistic.
- If you propose to try to raise taxes on the wealthy and lower taxes on the working and middle classes, that form of redistribution is condemned as communistic, unAmerican and unpatriotic.
For those who know their George Orwell, it's the economic version of the motto "Four legs good, two legs better". In this case, it's "Redistribution bad, redistribution upward good". And it's both smart policy and smart politics for President Obama to highlight that stark difference in approach and ask the American people which they prefer.
** For example, under current law, if I had invested $10,000 in Apple 30 years ago and held onto it, the stock would be worth $2.2 million today. If I sell the stock, I would pay a capital gains tax on the $2.19 million.
However, if I were to die still holding those shares, my lucky heirs would inherit that $2.2 million and no capital gains tax would ever be paid on that income. The Obama plan would close what it calls that "trust-fund loophole".
**** Ryan argues that he can recover the lost revenue not by raising taxes on the working and middle class, but by eliminating tax exemptions and credits in the current system. However, the Congressional Research Service reports that you'd have to eliminate every one of those exemptions to achieve the rate reductions sought by Ryan, and almost all of those exemptions assist the working and middle classes.
On Table 2, Page 7 of its report, the CRS lists the top 20 such exemptions. The four biggest are:
1.) Today, your employer's contribution to your health insurance is not considered taxable income. Eliminate that exemption, and anybody who has employer-provided health insurance gets a big tax hike.
2.) Today, your employer's contribution to your pension fund is not considered taxable. Eliminate that exemption, and anybody who has an employer-provided pension or 401(k) gets a big tax hike.
3.) Today, the interest that you pay on your home mortgage can be deducted from your total income before you pay taxes. Eliminate that deduction, and anybody paying a mortgage gets a big tax hike.
4.) Today, Medicare benefits are not considered taxable income. Eliminate that exemption, and anybody whose health care is paid through Medicare will see a significantly higher tax bill.