Surprise: Obama to back tax hikes in State of the Union

In an appearance on Meet the Press on Sunday, White House Press Sec. Josh Earnest summed up President Barack Obama’s theme for his coming State of the Union Address: “Middle class economics.” Read: Tax hikes.

“He will propose using revenue generated from the tax increases—which would fall mainly on high-income households—to pay for a raft of new breaks aimed at boosting stagnant incomes for low- and middle-income households,” The Wall Street Journal reported.

The White House plan would make broad changes to the tax bills of wealthier taxpayers, mainly by raising the taxes they pay on investments. The top capital gains rate would rise to 28% from 23.8%. The plan also would impose capital-gains tax on more inherited assets.

For high-income taxpayers, the Obama proposal would represent another significant increase in taxes on investment. It would boost the top rate to 28%, from the current 23.8%, for married couples with incomes over about $500,000.

The basic top tax rate on dividends and capital gains was lowered to 15% under the Bush administration. The Obama administration already has pushed the top rate to 20%, and added a special 3.8% tax rate for many types of investments. Along with other changes under Mr. Obama, the current top rate on investment income amounts to almost 25%, according to the Congressional Budget Office.

The administration said its proposed 28% capital gains rate would set the rate at the same level as under President Ronald Reagan ’s 1986 tax overhaul. But the Reagan-era overhaul also taxed earned income at a top rate of 28%; the top rate on earned income now is 39.6%.

The president will propose a variety of programs for low-income and middle-income Americans, many of which will be warmly greeted by the public. He will contend that these tax hikes will help pay for a new tax credit for working families in which both parents hold jobs. Obama will also claim that these hikes will facilitate tripling the value of and increasing access to the child-care tax credit.

The Journal report also indicates that that the revenue raised from these tax hikes will go to pay for new programs like his proposal for “free” community college. Obama will insist that all of his proposed tax increases target the wealthy but, according to Americans for Tax Reform, that’s not entirely true.

One of the tax hikes will target formerly tax-free savings in 529 college savings plans, the advocacy organization revealed. “Under the Obama plan, earnings growth in a 529 plan would no longer be tax-free,” ATR claimed. “Instead, earnings would face taxation upon withdrawal, even if the withdrawal is to pay for college. This was the law prior to 2001.”

Indeed. Rather than addressing the market distortions which are largely responsible for the absurdly high cost of a college education, by creating barriers between the consumer and the product they are consuming, the White House only plans to exacerbate this condition by hiding the true costs of a college education. Embracing that approach as a “solution” to rising college costs would be bad enough, but taxing college savings in order to cover new public costs is scandalous.

The White House is also going to target inheritance assets, which they claim unfairly escape capital gains taxes. While they are not proposing changes to the estate tax, the White House wants to treat bequeathed assets as gifts that would be subject to taxation. Obama’s pledge to close what he will call the “trust fund loophole” will sound like reasonable progressive populism to millions until they learn that this targets endowments over $200,000 (providing couples with a half million dollar exemption for their primary residence).

Even though some of these tax increases will do the middle class no favors, it is not clear they will be rejected by a majority of the public. Pollsters increasingly find that the Democratic Party’s message of economic populism is resonating with a public that has not seen their incomes increase in years.

“In one of the most important and interesting findings in this survey, a reform message opens votes up to a progressive economic narrative,” read a Democracy Corps memo released last week. “Voters who heard the reform message before hearing the Democratic economic messages were more than 10-points more likely to describe the Democratic framing as ‘very convincing’ as voters who heard the Democratic framing first (43 percent very convincing and 32 percent very convincing, respectively).”

The president is also positioning himself vis a vis congressional Republicans when negotiations over tax code reform begin in earnest. Many of the above proposals will be nonstarters for the Republican-dominated 114th Congress, but the administration is banking on broad public support to help overcome that opposition. They may just get it. It will be incumbent on Republicans to make the case for why the White House’s tax increases without sufficiently comprehensive offsets are counterproductive. For the last six years, the GOP has not done an effective job of communicating this to the public in a compelling manner.