Analysis: Three new taxes would reward workers

The state of the union is pretty good, actually, but President Barack Obama has an idea to make it better: taxing Wall Street and the super-rich to make middle-class work even more worthwhile. It’s Piketty with an American accent.

OK, that’s a little bit of an exaggeration, but not a huge one. Obama’s State of the Union will call for three new taxes on rentiers, their heirs, and the big banks to pay for tax credits, some new and some not, that will reward work. Here’s how those tax changes would work.

1 — End the step-up basis for capital gains. Unless you’ve inherited money, you might not realize that there’s a pretty big loophole that lets heirs avoid a lot of capital gains from ever being taxed. It’s called “step-up basis,” and the Congressional Budget Office estimates it will cost the government about 0.3 percent of GDP, or $667 billion, in tax revenue over the next decade.

Here’s how it works. Imagine you bought $1 million worth of stocks that are worth $10 million by the time you pass away. That’s a $9 million capital gain you’d owe tax on, which, at the 23.2 percent rate, works out to a little more than $2 million check for Uncle Sam — unless you leave the stock to, say, your kids. Then it’s as if your capital gain never happened, at least from the taxman’s perspective. That’s because the capital gain your heirs are taxed on isn’t based on the original price, or basis, at which you bought it. It’s based on the base at which they receive it. So, in this case, your kids would owe taxes only on gains above $10 million. This, as you could guess, most helps the people who have the most money to leave to their families.

But there would be exceptions to getting rid of step-up basis, of course. Couples, for one, wouldn’t have to pay any capital gains tax until they had both passed away. They also would get a $200,000 capital gain exception that they wouldn’t owe any tax on, in addition to a $500,000 exception for their home. Items such as furniture, clothing and small heirlooms would be exempt, too. Family-owned businesses wouldn’t have to pay any capital gains until or unless the business was sold, and slightly bigger, closely held businesses would have 15 years to pay whatever they owe.

And it’s not really an exception, but a loophole to ending the step-up basis loophole is that any capital gains payments, which would now be made at death, would be deductible from the estate tax. But that hits only individuals leaving more than $5.43 million or couples leaving more than $11 million.

2 — Raise the top capital gains tax rate from 23.8 to 28 percent. This is straightforward enough. Money you get from investments is taxed less than money you get from, you know, actually working, and although that might be good for the economy, it’s not good for a basic sense of fairness. Not when the top 400 households are getting 16 percent of all capital gains and the top 0.1 percent are getting half of them.

So Obama wants to push the top capital gains tax rate, which applies only to couples making more than $500,000, up from its current level of 23.8 percent to 28 percent, where it was when Ronald Reagan left office. In all, the White House calculates that increasing the capital gains tax and getting rid of step-up basis would raise 99 percent of its money from the top 1 percent, with 80 percent of that coming from the top 0.1 percent.

3 — Tax the big banks for being big. This is a new old idea that not only has Obama talked about before but also Republican Dave Camp. This latest iteration would impose a 0.07 percent fee on all liabilities for banks with at least $50 billion on the books. The idea is to make shareholders, rather than the government, break up too-big-to-fail banks. Tougher rules and tougher capital requirements, you see, have already started to make the biggest banks look uneconomical. Goldman Sachs even went so far, in a master class of trolling, as to suggest that JP Morgan Chase, the biggest of the bunch, would be better for shareholder if it split into four parts. That would be more true only if the Citgroups of the world had to pay a fee that offset some of the subsidy they got from other lenders for being perceived as too-big-to-fail.