Print
Category: National News

Washington, DC - Middle class families today bear too much of the tax burden because of unfair loopholes that are only available to the wealthy and big corporations. In his State of the Union address, the President will outline his plan to simplify our complex tax code for individuals, make it fairer by eliminating some of the biggest loopholes, and use the savings to responsibly pay for the investments we need to help middle class families get ahead and grow the economy.

The President will put forward reforms that include eliminating the biggest loophole that lets the wealthiest avoid paying their fair share of taxes:

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 get ahead, like his recent proposal to make two years of community college free for every student willing to do the work. The savings will pay for additional reforms that will help the paychecks of middle-class and working families go further to cover the cost of child care, college, and a secure retirement:

These new policies build on longstanding proposals to extend important tax credit improvements for working families, expand the Earned Income Tax Credit, provide quality preschool for all four-year-olds, and raise revenue to reduce the deficit by curbing inefficient tax breaks that primarily benefit the wealthy. In addition, the President has put forward a framework for fixing the business tax system on a revenue- neutral basis and using the transition revenue to pay for investments in infrastructure.

Eliminating the Biggest Loopholes that let the Wealthiest Avoid Paying Their Fair Share of Taxes and Reforming Financial Sector Taxation

Reforming the Taxation of Capital Gains

Rather than make it easier for middle-class families to make ends meet, our tax system has changed over time in ways that make it easier for the wealthy to avoid paying their fair share. Though President Obama restored top tax rates on the highest income Americans to their levels under President Clinton, high-income tax rates remain historically low, especially on capital income. Capital income taxes are also much lower than tax rates on income from work, which explains how the highest-income 400 taxpayers in 2012 – who obtained 68 percent of their income from capital gains – paid income tax at an effective rate of 17 percent, even though the top marginal income tax rate was 35 percent.

The problem is that the U.S. capital income tax system is too broken to address this unfairness just by raising tax rates. Current rules let substantial capital gains income escape tax altogether. Raising the capital gains rate without also addressing these loopholes would encourage wealthy individuals to take further advantage of the opportunities the current system provides to defer and avoid tax.

The largest capital gains loophole – perhaps the largest single loophole in the entire individual income tax code – is a provision known as “stepped-up basis.” Stepped-up basis refers to the fact that capital gains on assets held until death are never subject to income taxes. Not only do bequests to heirs go untaxed, but the “tax basis” of inherited assets used to compute the gain if they are later sold is immediately increased (“stepped-up”) to the value at the date of death – making the capital gain income forever exempt from taxes. For example, suppose an individual leaves stock worth $50 million to an heir, who immediately sells it. When purchased, the stock was worth $10 million, so the capital gain is $40 million. However, the heir’s basis in the stock is “stepped up” to the $50 million gain when he inherited it – so no income tax is due on the sale, or ever due on the $40 million of gain. Each year, hundreds of billions in capital gains avoid tax as a result of stepped-up basis.

The President’s proposal would close the stepped-up basis loophole by treating bequests and gifts other than to charitable organizations as realization events, like other cases where assets change hands. It would also increase the total top capital gains and dividend rate to 28 percent – the rate under President Reagan. (The top rate applies to couples with incomes over about $500,000.) It would:

Imposing a Fee on Large Financial Institutions

The President’s proposal would make it more costly for the largest financial firms to finance their activities by borrowing heavily. Specifically, the President’s proposal would impose a 7 basis point fee on the liabilities of large U.S. financial firms: the roughly 100 firms in the nation with assets over $50 billion. 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 that can have widespread economic costs. This approach is broadly consistent with a proposal from former Ways and Means Chairman Camp’s tax reform plan that would have imposed an excise tax on large financial firms.

Reforming the Tax System to Better Support and Reward Work

Creating a New “Second Earner Credit” for Married Couples Where Both Spouses Work

Two-earner couples can face high penalties for working. When both spouses work, the family incurs additional costs in the form of commuting costs, professional expenses, child care, and, increasingly, elder care. 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, especially for parents of young children and couples caring for aging parents. While women, including married women, are increasingly family breadwinners, the fact remains that they are still much more likely to be the ones who withdraw from the labor force in these circumstances, taking a toll on their future job options and earnings, and hurting our overall economic growth.

Building on Congressional proposals from members of both parties, the President is proposing to address these challenges with a new second earner credit that recognizes the additional costs faced by families in which both spouses work. A total of 24 million couples would benefit from this proposal, which would provide a new, simple second earner credit of up to $500. Families would claim a credit equal to 5 percent of the first $10,000 of earnings for the lower-earning spouse in a married couple, and the maximum credit would be available to families with incomes up to $120,000, with a partial credit available up to $210,000. 80 percent of two-earner married couples would benefit from the new credit.

Expanding the EITC for Workers without Children and Noncustodial Parents

The President’s plan to help working families get ahead incorporates his proposed childless worker EITC expansion, reducing poverty and hardship for 13.2 million low-income workers struggling to make ends meet while promoting employment. The President’s proposal would double the EITC for workers without qualifying children, increase the income level at which the credit phases out, and make it available to workers age 21 and older. Ways and Means Committee Chairman Ryan has endorsed the President’s proposed expansion, while other members of Congress have put forward similar proposals.

The President also continues to propose making permanent improvements to the EITC and CTC that augment wages for 16 million families with 29 million children each year. These improvements provide additional benefits to low-income working parents, families with three or more children, and married families, but are currently scheduled to expire at the end of 2017. Allowing these benefits to expire would result in a roughly $1,700 tax increase for a full-time minimum wage worker with two children. Research has consistently shown that the helping low-wage working families through the EITC and CTC not only boosts parents’ employment rates and reduces poverty, but has positive longer-term effects on children, including improved health and educational outcomes.

Making Child Care, Education, and Retirement Tax Benefits Work for Middle-Class Families

Simplifying and Expanding Child Care Tax Benefits

With the cost of infant and toddler care rivaling the cost of college in many states, the average child care tax benefit of $550 falls well short of what is needed to provide meaningful help to working families. The Child and Dependent Care Tax Credit and child care flexible spending accounts are also unnecessarily complex, often requiring significant paperwork and advanced planning for families to receive the full benefits.

The President’s tax proposal would streamline child care tax benefits and triple the maximum child care credit for middle class families with young children, increasing it to $3,000 per child. The President’s child care tax proposals would benefit 5.1 million families, helping them cover child care costs for 6.7 million children (including 3.5 million children under 5), through the following reforms:

The President’s child care tax proposal will complement major new investments in the President’s Budget to improve child care quality, access, and affordability for working families.

Consolidating and Improving Education Tax Incentives

While the creation of the American Opportunity Tax Credit in 2009 made college more affordable for millions of students and their families, our system of tax incentives for higher education is complex, and families are sometimes unable to take full advantage of these benefits. In fact, the Government Accountability Office (GAO) found that 27 percent of families who claimed one tax benefit would have been better off claiming another, while 14 percent of eligible families failed to claim any benefit at all.

Building on bipartisan reform proposals, the President’s education tax reform plan would simplify, consolidate, and better target tax-based financial aid. The President’s plan would cut taxes for 8.5 million families and students, simplify taxes for the more than 25 million families and students that claim education tax benefits, and provide students working toward a college degree with up to $2,500 of assistance each year for five years. These education tax reforms would complement the President’s other proposals to make college more affordable, including continuing historic increases in the Pell scholarship program and making a quality community college education free for responsible students. Together, these proposals would benefit students, families, and the broader economy by helping more students earn a postsecondary credential. The President’s education tax reform plan would:

Reforming Retirement Tax Incentives and Expanding Savings Opportunities

Americans face a daunting array of choices when it comes to retirement savings. While some workers are automatically enrolled in a retirement savings plan by their employer (with an option to opt out), others have to open an account, manage contributions, and research and select investments on their own. Meanwhile, tax loopholes have allowed some high-income Americans to accumulate tens of millions of dollars in tax-preferred accounts that were intended to help workers save for a secure retirement, not to provide tax shelters for the wealthiest few.

The President’s retirement tax reform proposals would dramatically expand access to employer-based retirement savings options, whether a new “auto-IRA,” 401(k), or other employer plan. These proposals would give 30 million additional workers access to a workplace savings opportunity and would complement the President’s actions over the past year to make saving for retirement easier by creating the simple, risk-free, and low-cost “myRA” starter savings vehicle. The President’s reforms to make the system more robust for middle-class workers would be paid for by closing retirement tax loopholes for the wealthy. The President’s retirement tax reform plan would: