State of the Union: Why Obama Finally Took on the One Percent

State of the Union 3
In his State of the Union address, the president unveiled an unapologetic plan to redistribute wealth. Kevin Lamarque/Reuters

CNN called it Barack Obama's Robin Hood turn and conservatives cried class warfare. But for the Democratic base, watching the president stand at the greatest bully pulpit on Earth and tell his audience to try working full-time and living on $15,000 a year was surely a special moment. They've waited six years for Obama to give them a night like this.

During his State of the Union address, the president used the sly term "middle class economics" to go after the one percent, proposing an unapologetic income redistribution plan that would take hundreds of billions from the nation's richest individuals to cover things the middle class wants like free community college and child tax credits.

The proposal calls for pulling in $320 billion over 10 years partly by raising the capital gains and dividends tax rate to 28 percent—the same rate that existed under President Ronald Reagan—for couples making more than $500,000 a year.

Progressives and tax code reformers say that because the U.S. has a lower tax rate on inherited wealth (23.8 percent) than on earned income (39.6 percent for top earners), this effectively creates a subsidy for the idle rich. The nonpartisan Congressional Budget Office has estimated that the capital gains tax cap de facto saves the Trustafarian set $1.34 trillion over the next 10 years—enough in martinis, sailing and fox-hunting to yank Detroit out of debt.

"The idea of taxing capital gains more like wages and other income has been a longtime goal of tax reformers," says Robert S. McIntyre, of Citizens for Tax Justice, a Washington, D.C.–based think tank and advocacy group. "It's not only that tax breaks for capital gains [and dividends] are a windfall for the rich. These breaks also encourage lots of wasteful tax shelters designed to convert ordinary income into lightly taxed capital gains called "carried interest".

A sweeping attack on wealth inequality might have had more than an icicle's chance in hell of passing back when Democrats had control of Congress. But Matt Gardner, executive director of the Institute on Taxation and Economic Policy, a Washington, D.C.–based nonprofit, says the administration did push to raise capital gains—every year—without success. It was a lost cause in the larger, howling fight over repealing the Bush tax cuts.

"It's hard to remember this now, but for much of the decade after 2001, the sole focus of the federal tax policy debates was what to do about the Bush tax cuts," Gardner says. "There was this never ending battle over this one issue, so you didn't hear people talking about corporate tax reform or carried interest."

Today, with the Bush tax cuts effectively repealed, the economy humming, job growth at pre-2000 rates and Obama enjoying his highest approval rating in years, the president apparently decided to take another shot at wealth inequality.

Raising capital gains tax is not a new idea for Obama or the Democrats. What's new in last night's proposal is going after a trust fund loophole that allows inheritors of capital to pay no taxes on increases in value that occurred before they inherited the assets in question.

Here's how it works: If Daddy Warbucks paid $100 for stock that's worth $10,000 when he dies, his heirs only pay taxes on the increases that accrue after their inheritance kicked in.

"The first gains never get taxed at all," Gardner says. "It's a huge loophole and the result for high-income taxpayers with large capital gains is they never get taxed. And nobody has really talked about repealing that for more than 20 years."

Besides the proposals to tax more private wealth, in his speech, the president went after the big banks, suggesting another $110 billion could be raised with a new fee on financial firms with more than $50 billion in assets to make borrowing and risky debt more expensive.

For Obama to use his penultimate State of the Union—his first to a Republican majority Congress—to suggest soaking the rich could be pure politics. It also might be something more—the start of a new national conversation, one that influences if not the actual tax code, the public discourse in 2016.

"If we're going to have arguments, let's have arguments—but let's make them debates worthy of this body and worthy of this country," Obama said. "As Americans, we don't mind paying our fair share of taxes, as long as everybody else does, too. But for far too long, lobbyists have rigged the tax code with loopholes that let some corporations pay nothing while others pay full freight. They've riddled it with giveaways the superrich don't need, denying a break to middle-class families who do."

Republicans portrayed Obama's plan as an attack on the middle class, pointing to a piece of it that raises taxes on college savings plans. Whether that strategy works remains to be seen in the days and weeks to come.

Obama's speech probably won't change a thing for the country's hidden elites, and Muffy and Kip can go on playing croquet in Palm Beach, as they do in the opening scene of Johnson & Johnson heir and filmmaker Jamie Johnson's documentary,The One Percent. Despite the nuanced analyses sure to come from Fox News and conservative talk radio, wealth managers won't be telling their clients to send their money to Luxembourg before the president of the United States confiscates their capital.

But if Obama keeps up the rhetoric, he just might increase public awareness of how public policy subsidizes wealth inequality. "We have an aristocracy in this country that has convinced everybody else that they don't exist," said Johnson, who is a billionaire.

At the very least, the president's tax proposal reminds everyone that the one percent is alive and well.