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”.
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.
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.
“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.