Ahead of tonight’s State of the Union address, U.S. President Barack Obama, is previewing a series of tax reforms that will be unveiled in that speech, including measures to close loopholes for the wealthy, bolster retirement savings, and impose a tax on large financial firms.
Obama announced a plan that, he says, is designed to eliminate loopholes that let the wealthiest individuals and big corporations avoid paying their fair share in taxes, and to help middle-class families. Among other things, he’s proposing to raise the capital gains tax rate to 28%, and to close what he says is the “single-largest capital gains loophole”. He will also propose a new fee on borrowing by the biggest financial firms; and, introduce a plan for automatic retirement savings.
The White House says that the planned changes to the capital gains tax will almost exclusively impact the top 1% of income earners, and will address a basic unfairness in the current system. “Most middle-class retirees spend down their assets during retirement, which means they owe income taxes on whatever capital gains they’ve accrued. But the wealthy can often afford to hold onto assets until death – which is what lets them use the stepped-up basis loophole to avoid ever having to pay tax on capital gains,” it says. By closing this loophole and subjecting billions of dollars to capital gains tax, the government says that its proposals will unlock capital for productive investment.
Among numerous other measures, Obama is also planning to propose retirement savings reforms that would require every employer with more than 10 employees that does not currently offer a retirement plan to automatically enroll their workers in an individual retirement account (IRA). It would also provide tax cuts for auto-IRA adoption, and for businesses that choose to offer employer plans or switch to auto-enrollment. And, it would propose to expand access to employer savings plans to part-time workers. The plan would also prohibit contributions to, and accruals of additional benefits in, tax-preferred retirement plans and IRAs once balances reach about $3.4 million.
Finally, the proposal would impose a seven basis point fee on the liabilities of large U.S. financial firms. Namely, the 100-odd firms with assets of more than US$50 billion. “The president’s proposal would attach a cost to leverage for the largest financial firms, leading them to make decisions more consistent with the economy-wide effects of their actions, which would in turn help reduce the probability of major defaults that can have widespread economic costs,” the White House says in a statement.
The U.S. securities industry is condemning the idea of a new levy on large financial firms. the president and CEO of the Securities Industry and Financial Markets Association (SIFMA), Kenneth Bentsen, Jr., said, “The imposition of a special, sector-only tax on the vast array of financial institutions captured by the president’s proposal under the guise of further limiting excessive risk completely ignores the changes this administration, Congress, regulators and industry have implemented over the past six years.
“Tax rules are often blunt instruments, and the tax code is not the place for a broad, new, and duplicative financial regulatory regime. This $110 billion targeted tax increase on America’s most productive financial institutions could have far-reaching unintended consequences that will curtail economic growth and job creation while negatively impacting the allocation of credit and the provision of financial services to individuals and institutions,” he added.