On Tuesday night, for once, the policy contents of the speech may well dominate things. Over the weekend, White House aides let it be known that President Obama will propose raising taxes on the very rich, to pay for tax breaks for the middle class. More specifically, he wants to increase the tax rate on capital gains for high earners, from 23.5 per cent to twenty-eight per cent, and he also wants to remove the so-called “step up in basis” loophole, which allows rich families to reduce, often greatly, the amount of taxes they pay on their estates. The money generated by these changes would be used for a variety of purposes, including a modest tax cut for middle-class married couples, an expansion in wage subsidies to low-paid workers, and an expansion of tax credits for students in higher education.
Khimm notes that the “proposal is specifically targeted at the wealth gap, which is actually far greater than the income gap”:
Over the last 30 years, top 1% by earnings received one-fifth of all income; by comparison, the top 1% by net worth owned one-third of the country’s wealth — and in recent years, it’s risen to 42%. That’s because wealth compounds itself over time and is taxed at lower rates than income for rich Americans. And it’s also because many ordinary Americans don’t save enough, and barely half are invested at all in the stock market. (The wealthiest 5% of Americans own more than two-thirds of stocks.)
Neil Irwin remarks that “one way to read President Obama’s plan is that it is a first try at what a post-Obama economic policy vision for the Democratic Party might be”:
It is elegantly sculpted to avoid some of the pitfalls of Obama-era partisan warfare. The president’s first term was an extended battle over stimulus, deficits and the role of government. The administration’s first, polarizing political battle was to enact a fiscal stimulus. Next was to expand the role of government in the health care system. Then, battles over deficit reduction that began when a Republican House took office in 2011 were really proxy fights for both parties, with those on the left pushing for continued stimulus and those on the right using the high deficits as a reason to reshape the scale of America’s social welfare state.
The new plan may stand little chance of passage, but it signals that we are moving into a different phase of the nation’s debates over how the government taxes and spends. As Ezra Klein of Vox tweeted Saturday night, this is the first big proposal of the “post-recession, post deficit panic era.”
The wage slowdown is the dominant force in American politics and will continue to be as long as it exists. Nothing drives the national mood — and, by extension, national politics — the way that the country’s economic mood does, as political scientists havedemonstrated. And nothing drives the economic mood as much as wages and incomes, which are the main determinant of material living standards for most households.
Matt O’Brien calls Obama’s plan “Piketty with an American accent”:
Okay, that’s a little bit of an exaggeration, but not a huge one. Obama’s State of the Union, you see, will call for $320 billion of new taxes on rentiers, their heirs, and the big banks to pay for $175 billion of tax credits that will reward work. In other words, it’s fighting a two-front war against a Piketty-style oligarchy where today’s hedge funders become tomorrow’s trust funders. First, it’s trying to slow the seemingly endless accumulation of wealth among the top 1, and really the top 0.1, no actually the top 0.001, percent by raising capital gains taxes on them while they’re living and raising them on their heirs when they’re dead. And second, it’s trying to help the middle help itself by subsidizing work, child care, and education.
Andrew Sprung is amazed by “the extent to which Thomas Piketty’s tome Capital in the 21st Century, published in the U.S. in January 2014, has focused the U.S. policy debate on income inequality”:
Democrats’ willingness to credit core conservative tenets — that raising taxes on high incomes and investment gains always inhibits growth, that deregulation always spurs it — are melting away. Fresh from their November drubbing, Democrats are beginning to heighten rather than soft-pedal the policy contrasts between the parties. Wounded politically by perceptions that the Affordable Care Act helps the poor at the expense of working people, they are looking for proposals obviously attractive to the middle class. Emboldened by accelerating growth and employment gains, they are perhaps shedding inhibitions about leveling the playing field between workers and management.
Derek Thompson glances at the big picture:
The United States has been, and will quite surely remain in the foreseeable future, the best place in the world for the very rich and an increasingly difficult place to earn a rising inflation-adjusted salary for the country’s bottom half. The road out is not hopeless, and the CAP paper on how the U.S. can learn from the rest of the world offers fine solutions across education, infrastructure, and working with cities to develop talent clusters. But this sort of ambitious policy landscaping is purely fanciful with today’s Congress. In this government, all big ideas are rain dances.
The White House is at pains to note that most of the individual middle- and working-class tax benefits they are proposing enjoy some measure of bipartisan support. But Obama is proposing to pay for them with what amounts to a series of tax increases on rich people. Republicans have made it very clear over the years that they do not believe that rich people should pay higher tax rates. To embrace this plan would entail not just a spirit of compromise that is generally lacking on Capitol Hill, but for the GOP to totally abandon one of its core economic principles.
Paula Dwyer points out that some of Obama’s proposals have Republican roots. But she argues that Obama just made tax reform less likely:
[A]ll of these details are obscured by Obama’s soak-the-rich message, one that Republicans won’t sign on to, despite their desire to help the middle class. In the past, they would have proposed government spending cuts, yet all the easy trims (and even some tough ones) have been made, and the declining deficit has put them in a tough spot on this issue. That’s a tough spot Obama could have exploited for compromise had he not rhetorically boxed in Republicans.
Regardless, Waldman hopes that Obama will spark a real debate:
You can argue — and many will — that it’s pointless for Obama to introduce significant policy proposals like this when he knows they couldn’t make it through the Republican Congress. But what alternative does he have? He could suggest only Republican ideas, but he wouldn’t be much of a Democratic president if he did that. Or he could offer nothing at all, and then everyone would criticize him for giving up on achieving anything in his last two years. If nothing else, putting these proposals forward can start a discussion that might bear legislative fruit later on. Major policy changes sometimes take years to accomplish, so it’s never too early to start. And if Republicans have better ideas, let’s hear them.