If you watched last night’s State of the Union address, you probably caught on to one of Barack Obama’s big themes: we’re doing better as a country than we were six years ago, so let’s take some money from rich people and give it to people who aren’t rich. His proposals in this vein weren’t as ambitious as they might have been and the political environment means they’ll never be realized, but he nonetheless laid down a marker for the party’s economic policy agenda heading into the next election.
Obama used the phrase “middle-class economics” five times last night, which is a pretty strong clue as to where his priorities lie. The president wants to furnish the middle class with a mess of tax credits and finance it by taxing rich people more for their investment income and preventing the children of rich people from dodging taxes on money they didn’t earn. These are both good things.
Borrowing from the income redistribution playbook of famed socialist Ronald Reagan, Obama would bump up taxes on capital gains to 28 percent. That increase would be felt almost entirely by the wealthiest of the wealthy, who are the disproportionate beneficiaries of earnings from capital gains. He’d also shut down the “step-up basis” loophole that the heirs of wealthy dead people exploit to exempt their inherited assets from taxation. “The White House calculates that increasing the capital gains tax and getting rid of step-up basis would raise 99 percent of its money from the top 1 percent, with 80 percent of that coming from the top 0.1 percent,” notes Matt O’Brien at the Washington Post.
That money would pay for an expansion of the Earned Income Tax Credit, an expansion of child-care tax credits, and an additional tax credit to help offset marriage penalties. All these measures would help out low- to middle-income Americans, and Obama made clear that he’s pushing income redistribution in pursuit of shared prosperity: “Let’s close the loopholes that lead to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth. We can use that money to help more families pay for childcare and send their kids to college.”
And while “inequality” only got that one brief mention in last night’s speech, any policy that goes after capital gains and dividends is striking at the very heart of income inequality. Earnings from investments are far and away the biggest driver of income inequality. Boosting wages and lessening the tax burden on lower-income Americans does help to lessen inequality, but to make real progress you have to go after capital gains.
All this is, of course, largely an academic exercise since literally none of these proposals will pass the Republican-held Congress. “It all looks like the same old tax and spend that the president has been advocating for the last six years,” Senate majority leader Mitch McConnell said yesterday. “He knows we're not likely to pass these kinds of measures.” The reasons the Republicans won’t pass them are many and familiar. They have no reason to fear, bow, or scrape to a president in the second half of his second term and no incentive to pay any attention to his policy agenda beyond rote denunciations of it. The party is also firmly wedded to the notion that no tax may ever be raised, especially if it’s the “job creators” who are taking the hit.
The curious thing is that several of Obama’s proposals should have Republican support. There’s some GOP backing for expanding the EITC, and Obama’s proposal to impose a new fee on big banks is similar to a proposal laid out by Republican Dave Camp. And Republicans should, in theory, go crazy for a tax cut for the middle class. The unbridgeable gap concerns funding – Obama favors actually paying for these things, while Republicans would rather cut taxes for everyone and use special voodoo math to balance the books.
Politically, however, Obama’s policy recommendations help to bring back clarity to the tax debate. The president’s focus on easing the tax burden on the middle class at the expense of the super wealthy may not translate into actual policy success, but it does a great job of hollowing out the Republicans’ economic arguments.
With the unemployment rate falling and job creation maintaining a brisk pace, Republicans have been forced to tweak their criticisms of the “Obama economy” to focus on the middle class – specifically the problem of wage stagnation. After December’s job report was released earlier this month, John Boehner released a statement saying: “Yet while the economy is showing some signs of improvement, far too many middle-class families are struggling to bridge the gap between rising costs and stubbornly flat paychecks.” Jeb Bush’s new PAC is apparently going to focus on income inequality: “While the last eight years have been pretty good ones for top earners, they’ve been a lost decade for the rest of America.”
The Republican message was simple: “Yeah yeah the rich are doing great, but what about the middle class???” Here comes Obama with a plan for the middle class, and the Republicans are left asking “But what about the rich???” That's the longstanding position they'd been trying to obscure in an effort to seem populist. With just a little bit of progressive policy mongering, Obama reset the GOP to its default settings.
There’s a lot more from Obama’s speech to digest, but this message on taxes and “middle-class economics” is a first step towards regaining some of the economic credibility the Democrats sacrificed in the run-up to last November’s midterm blowout. The fact of an improving economy wasn’t enough to save their hides then – they needed some policy prescriptions that actually speak to the lingering economic anxieties and unfairness of life in post-Great Recession America.