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Obama Goes After the 1 Percent

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
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President Barack Obama isn't kidding when he says the tax proposals he will outline in his State of the Union address would have an effect on inequality in the U.S.: The wealthiest 1 percent would pay the most, by far.

Income Inequality

In seeking to pay for measures aimed at helping the middle class, Obama has focused on reining in two big tax breaks. The first applies to stock dividends and long-term investment gains, which are taxed at a rate of no more than 20 percent (plus a 3.8 percent surtax for very high earners), compared with as much as 39.6 percent for ordinary income. The second is a loophole that excludes investment gains on property transferred at death, allowing heirs to avoid a big tax bill.

Taken together, the capital-gains and inheritance-tax breaks were worth more than $200 billion in 2013, the Congressional Budget Office estimated. The benefits accrued almost entirely to the rich: They boosted the after-tax income of the top 1 percent by more than 6 percent, and had an almost negligible effect on the lowest-earning 40 percent of U.S. households.

Here's a chart showing how much each income group gained from the breaks, as a share of after-tax income:

The wealthy need not rush to call their tax planners. Obama's proposals are highly unlikely to become law in today's political environment. They also wouldn't come close to eliminating the tax breaks. Obama would increase the top capital-gains rate only to 28 percent, and would require heirs to pay tax only on investment gains exceeding $200,000 per couple.

That said, with inequality becoming a pressing issue, the idea of changing the way the U.S. taxes capital will undoubtedly resurface. In a world where everyone started with nothing and spent all their savings over their lifetimes, critics of the idea would be right to protest: Taxing wealth would probably inhibit the investment needed for the economy to grow. But in a world like ours, where wealth is increasingly concentrated in the hands of a few and incomes are stagnating for the vast majority of workers, taxing the former to ease the burden on the latter makes a lot more sense.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net