What Obama's Tax Plan Would Mean for Your Wallet
In his 2015 State of the Union address, President Obama said his tax reform plan would lower taxes for middle-class families. According to a new analysis from the Tax Policy Center, that's not quite the case. According to the TPC's calculation, Obama's tax proposals would hike taxes on top earners, offer tax relief to low-income Americans—and change little for everyone in the middle.
Though there's a next-to-zero chance that Congress will pass Obama's plan as is, here's what it would look like, in dollars, if it were implemented. The Tax Policy Center found that the lowest 20% of earners—households making less than $25,260 a year—would save an average of $174 in 2016. The top 20% of earners would pay an average of $1,818 more.
The richest of the rich would take the biggest hit. Households in the top 1%—those earning more than $663,130 a year—would pay an extra $28,983 in taxes on average. And the top 0.01% would owe another $168,006. That sounds like a lot, but the top 0.01% of households earn more than $3.4 million a year. Under Obama's tax plan, their after-tax income would shrink by 2.6%.
So with the ultra-rich paying much higher taxes, the upper-middle class would still make out okay. Households at the lower end of the top 20%, in the $141,662 to $200,181 range, would actually keep another $116 on average.
And "middle"-middle class? They would pay just as much as they pay right now. Households earning between $49,086 and $84,055, the middle quintile of earners, would see almost zero change in their after-tax income. They would pay $7 more, on average.
In fact, households in the middle 60%—if you earn between $25,260 and $141,662, this includes you—would see a 0% to 0.1% increase in their after-tax income, on average.
Obama's plan has two main components. First, roll back tax laws that primarily benefit higher-income Americans. Second, create, expand, and consolidate tax credits that primarily benefit Americans with lower incomes.
For starters, Obama wants to increase the capital gains tax rate from 25% to 28% for taxpayers earning more than $500,000. That's the tax on your profits from the sale of assets such as stocks, bonds, mutual funds, or real estate. Unsurprisingly, the Tax Policy Center reports that high-income Americans report the most capital gains.
The president also wants to close what he calls the "trust fund loophole." Today, when you inherit an asset and later sell it, you owe taxes only on the gains you've earned since getting your inheritance (what's called a stepped-up basis). Obama is proposing taxing all gains based on the original value of the asset.
Those increased tax revenues would fund a new tax credit for two-earner families, expand the earned income tax credit for low-income taxpayers, and consolidate several education tax credits into a more generous American Opportunity Tax Credit for college students.
However, don't get too attached to your new tax return—Republicans have called the whole tax plan a "non-starter."
In fact, Obama has already had to abandon one of his ideas in the face of bi-partisan opposition. His plan initially included a new tax on 529 college savings accounts—your 529 investments would still have grown tax-free, but you would have paid taxes on your earnings when you withdrew the money, even if it was to pay for college. (The Tax Policy Center did not take the 529 proposal into account in its analysis.)
White House spokesman Eric Schultz said the administration dropped the idea because "it was a distraction."
And it goes to show how hard it is to change any aspect of the tax code.