Roosevelt Institute | Cornell University

Addressing the Income Gap: President ObamaAddressing the Income Gap: President Obama's "Middle-Class" Tax Reforms

By Jacob BarnesPublished February 22, 2015

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President Obama has proposed a series of reforms to the American tax system in his promotion of "middle-class economics," including increases to capital gains rates and expansion of the earned income tax credit. Will these proposals make it past Congress?
In his State of the Union address this past January, President Obama spoke optimistically about his idea of  "middle-class economics," "the idea that this country does best when everyone gets their fair shot, everyone does their fair share, and everyone plays by the same set of rules." Well, this antiquated dream is moving further from reality, according to a January report released by the Economic Policy Institute. In The Increasingly Unequal States of America: Income Inequality by State, 1917 to 2012, EPI reports that 39 states have seen the top one percent receive between half and all income growth since the 2008 recession. Faced with a system caught in a cycle of continually increasing economic inequity, President Obama must now face a GOP-controlled Congress in an egalitarian attempt to shrink the growing gap, and restore the American middle class.

In both the State of the Union address and subsequent budget proposal for the upcoming fiscal year, President Obama outlines a series of proposed changes to the American tax code in hope to end the growing polarization of the population.  The plan is centered on a set of tax rate increases that will hit the top hard, including the installation of trust fund taxes and an increase to taxes on capital gains and dividends. This increase on capital gains will create higher tax rates on both money made from the sale of assets and inheritances. In simpler terms, the President is proposing to increase taxes on money made from money, rather than on one's hard-earned wage. While this idea may settle well with the average American, the top quintile of earners make an average of fifteen percent of their income through capital gains, with the top one percent making an astounding 36% of their income through them.

The President's proposed tax reforms do more than just take from the top. Solving the country's growing income inequality must also involve giving to the bottom—or, in this case, taking less. The budget proposal includes a new $500 tax credit to dual-income households, as well as increases to childcare and education tax benefits, and an expansion of the Earned Income Tax Credit to childless adults. Several other noneconomic policies the President supports would help close the income gap through easier access to investment in human capital, such as the plan to provide two free years of community college for any American willing to work for it.

To see all of these policies made into law would be, well, a miracle. A set of reforms so clearly targeting the top for the benefit of the common man is unrealistic with a significantly red congress. But it is reassuring to see the middle class reemerge at the forefront of the American political agenda. With our economy in arguably its best position in recent memory, it is the right time to begin addressing the growing trend of economic inequality that has polarized the nation since the 1970s.  Regardless of whether the plan passes through Congress, President Obama's proposed reforms are a significant step toward the empowerment of the working-class American, and the mitigation of American economic inequality.