Obama Urges Higher Taxes to Arrest Middle Class Decline

The president calls for higher taxes on the rich to finance benefits for the middle class.

President Barack Obama prepares to deliver his annual State of the Union address to Congress in Washington DC, January 28, 2014
President Barack Obama prepares to deliver his annual State of the Union address to Congress in Washington DC, January 28, 2014 (White House/Pete Souza)

In what the political news website Politico described as a “Robin Hood-style proposal,” American president Barack Obama called for $320 billion in higher taxes for banks and the wealthy over a period of ten years on Tuesday in order to finance benefits for the middle class.

The president made his proposal in his annual State of the Union address to Congress.

Lacking a majority in the legislature, after Republicans took control of both chambers in November’s midterm elections, the Democrat is betting opposition conservatives will not resist measures that benefit middle America, especially when they need to prove their ability to govern after blocking the Obama agenda for much of the last four years.

However, Republicans’ priorities for tax reform are different from the president’s. Rather than raising taxes on the rich, they want to eliminate a bewildering array of deductions and tax credits in order to finance tax relief across income scales.

Republicans are also adamant about lowering America’s corporate tax rate which, at 35 percent, is the highest in the developed world.

Obama said in 2013 he wanted to lower corporate tax but failed to submit legislation to that effect.

On Tuesday, he proposed to raise the highest capital gains tax rate from 25 to 28 percent.

The tax on investment profit has been raised twice during Obama’s presidency so far. His signature health care reform was partially financed by a new 3.8 percent investment tax while the top rate was raised from 15 to 20 percent under a 2013 budget deal with opposition Republicans. The two provisions together raised the cumulative top capital gains rate to 25 percent.

Obama’s latest plan would also limit the amount Americans can save for their retirement relatively free of tax to around $3.4 million and raise taxes on the nation’s biggest banks.

The final element of the policy is an extension of expiring tax credits for low-income families, expiring tax credits for families with children and a continuation of higher-education tax benefits that are due to expire at the end of 2017.

Administration officials said the measures were part of an effort on the president’s part to aid a middle class that has seen little economic improvement since he first took office in 2009.

Although the American economy has recovered from the financial crisis and is adding jobs at the fastest rate since 1999, Federal Reserve survey data show families in the middle fifth of the income scale earn less and their net worth is lower than at the start of Obama’s presidency.

The Democrat has called for measures to halt the middle class’ decline in State of the Union addresses going back to 2011. He said at the time the erosion of middle-class jobs was a “Sputnik moment” that should energize the country to boost innovation and production, referencing the Soviet Union’s 1957 launch of the world’s first satellite that triggered the Space Race with America.

Last year, Obama acknowledged in his State of the Union speech that “too many Americans are working more than ever just to get by, let alone get ahead.” He said, “Our job is to reverse these trends.”

Middle incomes’ predicament is particularly stark when compared to the fortune of those at the top.

Between 2010 and 2013, the average net worth of families in the top 40 percent of incomes grew. For those in the middle fifth, it shrank 19 percent.

Similarly, the average earnings for families in the top 10 percent grew more than 9 percent from 2010 through 2013 while those at other levels stagnated or declined. For the middle fifth, earnings fell 4.6 percent on average.

The decline in middle incomes can be attributed to a steep decline in the values of homes between 2007 and 2010. The housing crisis, that led to a broader financial crisis, wiped out nearly half of the median family’s wealth in those years.

There has also been a decline in middle-class jobs. While the American economy has added jobs to the top and bottom of the wage scale since Obama took office, traditional middle-income positions have been outsourced or made redundant by mechanization.

Labor force participation has declined dramatically as a result. While some ten million Americans are unemployed, a roughly equal number is believed to have given up looking for work altogether.

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