In his budget to be released Tuesday, President Barack Obama will propose expanding a tax credit popular with lower- and middle-class families and paying for it by closing a controversial tax loophole deployed by some Wall Street firms, according to the White House.
Obama wants to expand the Earned Income Tax Credit, as well as programs to help Americans afford child care, send their children to college and retire. To pay for that, he would close tax loopholes that he says lets those who earn more money avoid the income and payroll taxes other workers pay.
The fiscal year 2015 spending plan will outline ways to achieve "real, lasting economic security and expand opportunity for all so that every American who is willing to work hard can get ahead," according to the White House.
Obama seeks to strengthen the Earned Income Tax Credit, making it more available for low income workers who do not have children. To pay for that -- roughly $60 billion -- he'd target a loophole that lets some Wall Street billionaires pay a maximum tax rate below 24 percent.
The administration thinks that under the plan, 7.7 million more Americans could qualify for a larger tax credit than they currently get, and another 5.8 million workers would be newly eligible for the credit.
Obama would double the current maximum tax credit available for childless workers -- from $500 to $1,000 -- and raise the top salary at which it ends for a single, childless worker to about $18,000. It also lowers the eligibility age on both ends, down to 21 from 24 and up to workers aged 66 and changes different income thresholds for the credit.
The administration proposal notes that the biggest benefactors would be cashiers, store clerks, waiters and cooks.
Economists favor the earned income tax credit because it creates an incentive to work, returning more of the fruits of labor to the bottom rungs of the income ladder. They are most likely to spend that money directly in the economy, as better paid workers tend to save some of what they earn.
In order to pay for this expansion, the administration will target companies currently enjoying a tax loophole involving carried interest. Carried interest refers to a practice where private equity firms, hedge funds and some real estate trusts pay their managers largely through a percentage of future investment earnings. Investment income is taxed at a lower rate than ordinary income, and currently has a maximum rate of 23.8 percent. It’s why billionaire investor Warren Buffett has frequently decried the fact that he pays a lower tax rate than his secretary.
In a document shared with reporters ahead of the budget release, the administration notes that the idea of having these investment managers taxed at a rate of ordinary income is precisely what was included in the nearly 1,000-page proposed revamp of the tax code offered earlier this month by Rep. Dave Camp, R-Mich., chairman of the tax-writing Ways and Means Committee.
Obama's plan would also:
- Expand the child and dependent care tax credit, targeted to families with children under the age of 5. The White House estimates about 1.7 million families would benefit from this expansion in 2015, receiving an average tax cut of more than $600.
- Establish automatic IRAs to encourage workers to save. The administration estimates that about 13 million workers would begin contributing to retirement through this proposal.
- Permanently extend the American Opportunity Tax Credit, which the White House estimates would benefit 11.5 million families and students by an average of more than $1,100.
- Simplify taxes for Pell Grant recipients, which the White House says would impact nearly all of the 9 million recipients.
- Provide tax relief to student loan borrowers by excluding loan forgiveness from taxation for borrowers who have made payments for many years under an income-related repayment plan.
Obama's budget will include $56 billion in new spending split between the Pentagon and domestic initiatives such as early childhood education, jobs training and help for manufacturing.
All programs would be financed by tax increases or other offsets, making them unlikely to pass Congress but still a ready tool for Democratic candidates to use in congressional elections this fall.