Obama’s tax plan is dead on arrival, but would take on a tax system rigged in favor of the rich

President Obama will propose in his State of the Union speech bold tax increases on the wealthy. Those tax increase proposals will be dead on arrival in Congress where Republicans now control both houses by significant majorities. But if enacted, those tax increases would address at least two of the many reasons why the tax system is perceived as rigged in favor of the rich.

In a fair tax system, shouldn’t two taxpayers with equal incomes be taxed equally? But that’s not the case in the U.S. tax system where income from capital is taxed at lower rates than income from labor. Taxpayers in the highest income brackets gain the most benefit from this distinction. The top rate on ordinary income is 39.6%. But the top rate for income from capital is generally 20%. And taxpayers in the highest income tax brackets have a disproportionately large share of the nation’s income from capital. This explains why billionaire Warren Buffet pays a lower tax rate on his large income than his secretary pays on her modest secretarial income. It also explains why 2012 presidential candidate Mitt Romney reported paying only 15% tax (then the top capital gains rate) on his large income earned from managing investments, although many middle-income taxpayers pay a higher rate on their earned income from labor.

President Obama is not so radical as to propose taxing income from capital and from labor at the same rates, which is what President Reagan actually did in 1986 when the top rate for both was set at 28% in what is widely considered to have been the high-water mark for tax reform in America. Instead President Obama proposes merely to narrow the gap between the tax rates for ordinary income and capital gains by raising the top rate on capital gains to 28%, while leaving the top rate on earned income from labor at 39.6%. This change would increase taxes on the wealthiest taxpayers who receive most of their income from capital, like Warren Buffet and Mitt Romney.

President Obama would also like to eliminate the tax-free treatment of gain on property passed from a decedent to the decedent’s heirs. Normally, if a taxpayer buys something for $1,000 and sells it later for $100,000, that taxpayer would have to pay tax on the gain of $99,000. But the law provides that if that appreciated property is not sold during taxpayer’s life, but instead is inherited by heirs after taxpayer’s death, then the gain disappears untaxed and the heirs hold the property as if they bought it for fair market value at the decedent’s death.

Which decedents and families benefit the most from the tax-free treatment of gains in property held at death? Obviously those with the most appreciated property which they can afford to hold until death, i.e., the rich, who don’t have to sell assets to pay for medical expenses, vacations, or their children’s educations. President Obama thinks that all unrealized gains above a certain limit in a decedent’s property, should be taxed at death just as if it had been sold during life.

President Obama would like to use the considerable tax revenue that would be raised by his proposals to help lower- and middle-income Americans who have been suffering from stagnant wages and job insecurity even as the stock market has been hitting record highs widening the economic inequality between those who have big investments in the stock market and those who don’t.

President Obama won’t do what would actually help lower- and middle-income American workers, enforce existing immigration law to limit, as Congress intended, the number of legal immigrants entering the work force each year to compete with American workers for jobs and wages. Instead President Obama is acting unilaterally to grant deferred action by executive order which will allow millions of illegal aliens to obtain work authorization and compete with American workers for jobs and wages, while putting increased demands on our struggling public schools, health care system, and infrastructure.

And by proposing the expansion of such incentives as the refundable earned income tax credit and child tax credit, the President is making it more profitable for work authorized illegal aliens to tap into the U.S. treasury, obtaining refundable tax credits.

While President Obama proposes increasing taxes on the rich, his policies also benefit the rich by helping them to keep American wages down and corporate and business profits up.