Obama to Address Wage Stagnation With More Taxes, More Spending

In his upcoming State of the Union Address, President Barack Obama is going to announce a new tax reform policy, aimed at redistributing even more wealth from the rich to working-class families, in a controversial strategy aimed at boosting the incomes of Americans.

MOSCOW, January 18 (Sputnik), Kristian Rouz – The Obama administration is taking their aim at the financial resources of the 1% top wealthiest Americans, as the President is about to unveil tax reforms on the previously undertaxed trust funds and individual retirement accounts (IRAs) of America’s biggest earners. Claiming such pension and inheritance schemes are used in some cases for tax evasion, the Democrat administration in the White House has already triggered a wave of discussions and a harsh opposition from Republicans, who claim that these policies would be detrimental for businesses and employers.

According to a statement the White House made Saturday, President Obama in his State of the Union Address, due Tuesday, will unveil his plan to limit the maximum size of an IRA account for each American to no more than $3.4 mln, allowing a yearly income of $210,000 at retirement. The IRA’s of several wealthy Americans are far larger than this figure, and, being mostly tax-free, they have come under claims as a way to commit tax evasion.

“Loopholes in the tax system have let some wealthy individuals convert tax-preferred retirement accounts into tax shelters,” the White House said, having also pointed out that “the wealthy pass appreciated assets onto their heirs tax-free”.

According to a GAO report on IRAs, only 9,057 out of the 43,013,341 American taxpayers with IRAs (a negligibly small percentage really) had accumulated more than $5 mln on their tax-free accounts by the end of 2011. Another 36,171 people have $3 mln to $5mln on the IRA balance sheet.

Increasing the tax burden on capital assets will only bring in negligible fiscal gains. Hence the recent speculation in several media outlets that Obama’s incentive is a slap in the face of America’s top earners and not a sound fiscal strategy. The White House also said in the statement the move would “impact the top 1 percent” of Americans.

The numbers are as follows: President Obama is expected to propose a 28% yearly tax on capital assets exceeding $500,000, the same as during the Reagan era, the White House notes. Previously, the Obama administration hiked the top capital income tax from 15% to 23.8%.

Consequently, only IRAs not exceeding the $3.4 mln limit would remain tax-free. Given that the total amount of such accounts does not exceed 10,000, US budget gains would be minimal, However, the move will take its toll on the volume of US domestic investment – as IRA money is usually well-managed.

“Slapping American small businesses, savers and investors with more tax hikes only negates the benefits of the tax policies that have been successful in helping to expand the economy, promote savings, and create jobs,” the Republican Orrin Hatch, head of the Senate Finance Committee said yesterday as quoted by Bloomberg.

The White House claims the tax reform would aid small businesses by allowing small IRAs to be tax-free (up to $200,000 yearly income per couple, $100,000 per individual).  The President is also intending to ‘aid’ working-class families by offering government-backed credits and expanding child benefits. This rhetoric in general means a yet another increase in social spending, which will ultimately far exceed the budget gains of the proposed tax hikes, as there are an estimated 13.2 mln working families with 29 mln children estimated to be included in this scheme.

All in all, the anticipated tax hike would not be significant: the White House previously laid out a more ambitious tax plan that would have increased US budget income by $320 bln over the next 10 years, but that proposal had no chances to pass through Congress.

For fairness’ sake, it is necessary to say that by introducing such measures President Obama is trying to address an issue that has been plaguing America for the recent 15 years: the stagnation in real income growth. Real wages have not outpaced inflation since the year 2000 statistics show, something not seen since the Great Depression of the 1930s.

“What you’re seeing here is really dedicated middle-class tax relief to really get at that problem of middle-class wage stagnation,” Harry Stein of the pro-Democrat Center for American Progress in Washington said as quoted by Bloomberg.

Obama’s tax reform, even in its moderate version, will still face a tough opposition from the Republican-controlled Congress, as the GOP believes budget spending needs to be trimmed generally.