A serious budget proposal it was not. President Barack Obama’s penultimate State of the Union will be noted for its unabashed economic populism. Barely two months after his party lost the midterm elections, Mr Obama issued the kind of shopping list on which Democrats had unsuccessfully campaigned.
As an exercise in bridge building, Mr Obama scores low marks. But as a statement of America’s economic challenges in the years ahead, there was more substance to it than Republicans may have heard. Mr Obama was right to declare that the US economy has turned a page — having created more jobs since the Great Recession than all the other wealthy countries put together. He was also right to imply that this was a low bar to clear. A majority of Americans remain worse off than they were at the start of the century. In setting out the case for “middle-class economics” Mr Obama offered an alternative to its trickle down variety. It is a debate worth having.
When he began his presidency, Mr Obama told obstructionist Republicans that “elections have consequences”. He went on to push through an $800bn stimulus that helped pull the US out of recession. It was a necessary step that was met with near unanimous Republican opposition.
Today Mr Obama inherits the strongest Republican Congress since 1949. It will keep control of both chambers until he leaves office and probably beyond. Nothing will happen unless Mr Obama can persuade Republican leaders that it is in their interests. Much of what Mr Obama put forward on Tuesday night should be passed on its own merits. The US federal minimum wage is low by historic standards. Community college remains too expensive for many low-income Americans. Seven days of annual paid sick leave is not too much to ask. Marginal taxes on the middle class remain too steep. Yet in failing to acknowledge the scale of his party’s heavy defeat in last November’s midterms, Mr Obama set the wrong tone for a productive Congress. Whatever the merit of its substance — and there was much — it was an ungracious speech.
That said, it was also a coherent one. Mr Obama’s tax proposals make sense on their own terms. Under his plan, he would raise $320bn in the next decade by raising the capital gains tax on high-income earners to 28 per cent — the same level as under Ronald Reagan. He would also close a big loophole that enables many wealthy estates to avoid paying inheritance taxes altogether.
There was also a small surcharge on the liabilities of “too big to fail” banks. The proceeds would be spent on rewards to work, including tripling the child credit to $3,000 a year and raising the benefits to two-earner households. In addition, Mr Obama would step up much needed spending on US infrastructure, which would also boost the middle-income labour market.
In economic terms, shifting the tax burden from income to capital makes sense. There is no evidence it would reduce efficiency. There is plenty to show that too much of the US labour force remains work shy and discouraged. Mr Obama’s tax plan would provide a healthy tweak to a system that is skewed towards owners of financial assets, rather than those seeking to re-enter the workforce. It deserves support. Unfortunately, it is unlikely to win enough to pass Congress. It is hard to believe Mr Obama thought his speech would raise that likelihood. Instead, his target was to help set the Democratic agenda for the 2016 presidential election. Once again, Mr Obama has shown what a good campaigner he is. The doubts concern his aptitude for governing.
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