Here's what it would do exactly.
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 (CBO) estimates it will cost the government about 0.3 percent of GDP the next decade.
Here's how it works. Now, 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 like 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, that you bought it at. It's based on the base that they receive it at. So, in this case, your kids would only owe taxes on any gains above $10 million. This, as you could guess, helps the people who have the most money to leave to their families the most. Indeed, you can see that in the chart below from the liberal Center for American Progress. The top 1 percent of households got 21 percent of the total benefits from stepped-up basis, the next 4 percent got 28 percent, and everybody else got the other half.
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. Things like 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 value of your estate when it comes to that tax. But that, remember, only hits 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 while 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. That's why, as the Congressional Budget Office (CBO) dryly puts it, "preferential tax rates on dividends and capital gains provide almost no benefit to households in the bottom four quintiles, but provide notable benefits to households in the top quintile".
So Obama wants to push the top capital gains tax rate, which only applies 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 so has 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. This isn't the government trying to break up too-big-to-fail banks, but it might nudge shareholders to do so. 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 shareholders if it split into four parts. That'd only be more true 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. Activist investors would push management to shrink their banks to the $50 billion threshold, either by breaking up their businesses.
4. Subsidize middle-class work. The economy is finally adding jobs at a healthy clip, but wages still aren't rising and people are still dropping out of the workforce. These last two, as you might expect, are related. If you're a stay-at-home parent, it's not just a matter of wanting to work. It's a matter of whether working makes financial sense. Once you add up the costs of childcare and commuting, a lot of times it doesn't. That's why Obama wants to introduce a second-earner tax credit of $500, the full value of which would be available to families making up to $120,000 and would then phase out until $210,000, to try to make work worth it for stay-at-home parents. And why he wants to not only triple the maximum value of the Child Care Tax Credit to $3,000, but also massively expand who can claim it by letting households making up to $120,000 do so.
That's not all. As he has before, Obama is calling for the Earned Income Tax Credit to be doubled for childless workers, to try to get more young men in particular into the workforce—an idea that Republican Paul Ryan has endorsed. In addition, Obama is asking for college tax credits to be streamlined, extended, and expanded so that $1,500, rather than $1,000, is refundable. And finally, Obama wants to help more workers save for retirement by automatically enrolling them in an IRA if their job doesn't have one.
None of this, it's worth pointing out, is welfare. It's helping people who are already helping themselves, either by going to school, working, or saving for retirement. It's just acknowledging that growth alone hasn't been enough to do that for a long time now. And these are ideas, to be honest, that some Republicans support too. The question, then, isn't how to help the middle class. It's how to pay for it. Obama wants to make the top 1 percent and Wall Street do so. Republicans don't.
That, like every other one, will be what the 2016 election is about.