In his State of the Union address, President Obama outlined a new policy of "middle class economics," with a new tax proposal as its centerpiece. That plan would boost taxes on capital gains — income that is concentrated among the richest Americans — and provide a variety of tax breaks to lower- and middle-class workers, among other things.
The Tax Policy Center, a Washington, DC think tank, has run the numbers and found that the biggest changes from this tax plan will be at the bottom and top of the spectrums … and that the gains for the poorest Americans will be modest on average.
The bottom 20 percent would see their after-tax incomes grow by around 1.2 percent, while people in the top 20 percent would receive -0.7 percent less.
But looking at dollar changes, the differences between the bottom and the top are much bigger. The bottom 20 percent would save $175 more per year on average, while the top 20 percent would pay an additional $1,800 per year. Things get steeper among higher-income Americans — the top 1 percent would be left with $29,000 less than now, on average, and the top 0.1 percent would have $168,000 less on average. In the very middle 20 percent, meanwhile, there would be virtually no change in income — a hit of $7 on average.
Of course, not everyone will be equally affected, and the center provides range estimates as well for the changes that people in any given quintile would see. In the very middle, nearly half of households would indeed get a tax hike of around $290, while a quarter would get an average tax cut of $550. And in rare cases, some people at the very bottom could end up with lower after-tax incomes, and some people at the top could end up with higher after-tax incomes.
The main reason for that potential tax hike for some middle-income households, the TPC says, is because its analysis takes into account the administration's tax on the biggest banks. Though that doesn't directly affect workers, the analysis assumes that higher taxes on big banks would indirectly affect workers, for example, through lower compensation. Without including the big bank tax, only 6 percent of middle-quintile workers would face a tax hike. But on average, middle quintile workers would still only get a $12 tax cut in this example.
But there's one important thing to keep in mind: this proposal will never pass, as Matt Yglesias pointed out before last week's State of the Union. The tax proposal is mostly important for two reasons at this point. One is as a piece of the White House budget, which will be released next week (and the center will revise its figures once the budget is out). This tax reform proposal, together with all of the administration's other spending proposals, will give a sense of the administration's proposed priorities for the federal government.
But the tax reform proposal, like the president's budget (which itself will never pass Congress, either), is also a political statement. The tax reform proposal is a way for Obama to emphasize what he believes is wrong in the US economy — that is, that work just isn't paying the way that it used to. Wages are stagnant, but workers are seeing so many incomes at the top pull away from the bottom 99 percent, thanks in part to income from capital gains (that is, income that doesn't come from a paycheck). Obama wants to make it more attractive to work, as Ezra Klein wrote this morning, and this tax reform plan is the president's way of saying that redistribution is one way he wants to do it.
Correction. This piece initially characterized some of TPC's figures as changing people's tax bills, but the more accurate way to characterize it is as changing people's after-tax incomes. It has also been updated to explain how the big bank tax affects the analysis.