MONEY Taxes

What Obama’s Tax Plan Would Mean for Your Wallet

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Peter Dazeley—Getty Images

The president's State of the Union proposals probably won't go anywhere. But if they did, the true "middle class" would barely notice a change, a new study concludes.

In his 2015 State of the Union address, President Obama said his tax reform plan would lower taxes for middle-class families. According to a new analysis from the Tax Policy Center, that’s not quite the case. According to the TPC’s calculation, Obama’s tax proposals would hike taxes on top earners, offer tax relief to low-income Americans—and change little for everyone in the middle.

Though there’s a next-to-zero chance that Congress will pass Obama’s plan as is, here’s what it would look like, in dollars, if it were implemented. The Tax Policy Center found that the lowest 20% of earners—households making less than $25,260 a year—would save an average of $174 in 2016. The top 20% of earners would pay an average of $1,818 more.

The richest of the rich would take the biggest hit. Households in the top 1%—those earning more than $663,130 a year—would pay an extra $28,983 in taxes on average. And the top 0.01% would owe another $168,006. That sounds like a lot, but the top 0.01% of households earn more than $3.4 million a year. Under Obama’s tax plan, their after-tax income would shrink by 2.6%.

So with the ultra-rich paying much higher taxes, the upper-middle class would still make out okay. Households at the lower end of the top 20%, in the $141,662 to $200,181 range, would actually keep another $116 on average.

And “middle”-middle class? They would pay just as much as they pay right now. Households earning between $49,086 and $84,055, the middle quintile of earners, would see almost zero change in their after-tax income. They would pay $7 more, on average.

In fact, households in the middle 80%—if you earn between $25,260 and $141,662, this includes you—would see a 0% to 0.1% increase in their after-tax income, on average.

Obama’s plan has two main components. First, roll back tax laws that primarily benefit higher-income Americans. Second, create, expand, and consolidate tax credits that primarily benefit Americans with lower incomes.

For starters, Obama wants to increase the capital gains tax rate from 25% to 28% for taxpayers earning more than $500,000. That’s the tax on your profits from the sale of assets such as stocks, bonds, mutual funds, or real estate. Unsurprisingly, the Tax Policy Center reports that high-income Americans report the most capital gains.

The president also wants to close what he calls the “trust fund loophole.” Today, when you inherit an asset and later sell it, you owe taxes only on the gains you’ve earned since getting your inheritance (what’s called a stepped-up basis). Obama is proposing taxing all gains based on the original value of the asset.

Those increased tax revenues would fund a new tax credit for two-earner families, expand the earned income tax credit for low-income taxpayers, and consolidate several education tax credits into a more generous American Opportunity Tax Credit for college students.

However, don’t get too attached to your new tax return—Republicans have called the whole tax plan a “non-starter.”

In fact, Obama has already had to abandon one of his ideas in the face of bi-partisan opposition. His plan initially included a new tax on 529 college savings accounts—your 529 investments would still have grown tax-free, but you would have paid taxes on your earnings when you withdrew the money, even if it was to pay for college. (The Tax Policy Center did not take the 529 proposal into account in its analysis.)

White House spokesman Eric Schultz said the administration dropped the idea because “it was a distraction.”

And it goes to show how hard it is to change any aspect of the tax code.

TIME Cuba

The U.S. Will Not Return Guantanamo Bay to Cuba, the White House Says

Military officers stand at the entrance to Camp VI and V at the U.S. military prison for 'enemy combatants' on June 25, 2013 in Guantanamo Bay, Cuba.
Military officers stand at the entrance to Camp VI and V at the U.S. military prison for 'enemy combatants' on June 25, 2013 in Guantanamo Bay, Cuba. Joe Raedle—Getty Images

U.S. has leased land on Guantanamo Bay since the 1903 Cuban–American Treaty

Despite the recent historic thaw in U.S.-Cuba relations, the White House said Thursday it had no plans to return Guantánamo Bay, the site of a significant U.S. naval base and military prison on the island-nation’s southeast coast.

This announcement comes in response to Wednesday’s statement from Cuban President Raúl Castro that restoring Havana’s control of the bay is a prerequisite for normalizing ties with the U.S, Agence France-Presse reports.

However, White House spokesman Josh Earnest indicated any such move was off the cards. “The President does believe that the prison at Guantánamo Bay should be closed down,” he said. “But the naval base is not something that we wish to be closed.”

The U.S. currently controls over 45 sq. mi. of Guantánamo Bay as a result of treaties dating back to the Spanish-American War. The military prison has been embroiled in controversy for reports of torture and the absence of trials for inmates accused of terrorism.

The U.S. and Cuba reopened diplomatic ties in December after over 50 years of nonacknowledgment. Obama issued an executive order to close the Guantánamo prison in 2009, but so far this has not come into fruition.

[AFP]

TIME China

Why China Is Nervous About Its Role in the World

Hong Kong based Vietnamese demonstrators carry Vietnam's flag during a protest against China's territory claim in Hong Kong
Hong Kong based Vietnamese demonstrators carry Vietnam's flag during a protest against China's territory claim in Hong Kong May 25, 2014. Around 200 people marched on Sunday to declare Paracel Islands belong to Vietnam. REUTERS/Tyrone Siu (CHINA - Tags: POLITICS CIVIL UNREST TPX IMAGES OF THE DAY) TYRONE SIU—REUTERS

China’s fear of closer ties between the U.S. and India may indicate growing economic problems at home

In the wake of President Obama’s historic trip to India, China issued an unsolicited and perplexing statement downplaying the relevance of the visit. As the White House pointed out in response, the only thing significant about China’s statement was the fact that the Asian nation felt the need to make it in the first place.

The rivalry between China and India for economic power and strategic control in Asia is longstanding and is likely to continue into the foreseeable future. But China’s taunt is not necessarily a sign of its hostility towards India but an inadvertent admission of its declining supremacy in the region.

China, once an accepted economic and military juggernaut and the darling of investors the world over, is now facing both economic and strategic challenges which could slow down its progress.

First, China’s economy seems to be shrinking. With industrial activity trending down and interest rate cuts yet to produce results, it’s looking likely that China’s meteoric economic rise may have peaked and, according to a report from the Conference Board, could lead to a 4% GDP growth rate in the future, which is considerably lower than in previous decades. Further problems plaguing China include a debt overhang, a real estate bubble, lack of competition, and an old-world industrial economy instead of a more modern information economy such as that of the U.S.

In addition, India’s economic growth is predicted to outpace China’s by 2016, according to the International Monetary Fund, a fact that doesn’t bode well for China’s dominance of Asia. That’s not to say that China will cease to be an economic power but that it may not be able to exert the same clout on the world stage that it once did.

Another major shift could be in China’s ability to use the specter of its military might to secure favorable trade terms with other nations. That specter, even as it grows, could be undermined by higher defense spending by India and Japan (aided by the U.S.), who are eager to contain China. At the same time, China can’t bank on Russia for support since the latter is facing its own crisis from low oil prices and economic sanctions. This could leave China isolated and weaken its position with trading partners.

Finally, there is the democracy factor. The recent protests in Hong Kong were an indication of the tenuousness of China’s draconian control over its people, and possibly of political upheaval to come.

In economic terms, this means that although China has done a fairly good job of balancing free market principles with state run control, the desire of citizens for democracy could force China to relax regulatory control over businesses, embrace labor reform, and truly open its markets in the not-too-distant future. That’s good news for investors but depends heavily on the reaction of the Chinese government, whose response to pro-democracy forces could be unpredictable and severe. Also, a sudden rise in labor costs due to free market forces could in itself disrupt the economic ecosystem in China, and have a negative impact on both domestic and foreign companies that rely on the labor pool.

Given this context, it becomes easier to understand just why China is nervous about closer ties developing between the world’s two largest democracies, the U.S. and India, and why global investors should be wary of the Chinese economic miracle. For sure, China will continue to be an influential player and has demonstrated resilience in the face of difficulties before, but investors looking to make money from the region should still temper their enthusiasm with a realistic assessment of where the nation is now.

Sanjay Sanghoee is a business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, at hedge fund Ramius Capital, and has an MBA from Columbia Business School.

TIME Budget

Government Budget Cuts Are Hitting ‘Red’ States Hardest, Say Analysts

A red traffic light stands in front of the U.S. Capitol building in Washington
A red traffic light stands in front of the U.S. Capitol building in Washington September 30, 2013, approximately one hour before the U.S. federal government partially shut down after lawmakers failed to compromise on an emergency spending bill JAMES LAWLER DUGGAN —REUTERS

Experts suggest the discrepancy may point to the politicalization of public spending

Recent governmental budget cuts have not been distributed evenly with slashed spending hitting pro-Republican states the hardest, according to new analysis by Reuters.

Funding for a range of discretionary grant programs has fallen 40% in Republican states compared to a drop of only 25% in swing states or states that tend to support the Democrats, claims the news agency.

“I would suggest these numbers would tell us there is politicization going on,” said John Hudak of the Brookings Institution, who helped Reuters analyze the federal spending.

The money that the government allocates to discretionary spending goes to initiatives like the Head Start preschool education scheme and anti-drugs programs.

Read more on the study at Reuters

TIME Immigration

Government Tells Agents to ID Which Immigrants Not to Deport

Rosa Lozano, Lita Trejo, Ramon Romero
Rosa Lozano, left, translates the speech into Spanish as they listen to President Barack Obama announcing executive actions on immigration on Nov. 20, 2014 Alex Brandon—AP

Immigration agents have been ordered to ask undocumented workers if they qualify for Obama's new plans to avoid deportation

(WASHINGTON, D.C.) — The Obama administration has ordered immigration agents to ask immigrants they encounter living in the country illegally whether they might qualify under President Barack Obama’s plans to avoid deporting them, according to internal training materials obtained by The Associated Press.

Agents also have been told to review government files to identify any jailed immigrants they might be able to release under the program.

The directives from the Homeland Security Department mark an unusual change for U.S. immigration enforcement, placing the obligation on the government for identifying immigrants who might qualify for lenient treatment. Previously, it was the responsibility of immigrants or their lawyers to assert that they might qualify under rules that could keep them out of jail and inside the United States.

It’s akin to the Internal Revenue Service calling taxpayers to recommend they should have used certain exemptions or deductions.

The training materials apply to agents for Customs and Border Protection and Immigration and Customs Enforcement. They instruct agents “to immediately begin identifying persons in their custody, as well as newly encountered persons” who may be eligible for protection from deportation.

One training document includes scenarios describing encounters between agents and immigrants with guidance about how agents should proceed, with a checklist of questions to determine whether immigrants might qualify under the president’s plans. ICE officials earlier began releasing immigrants who qualified for leniency from federal immigration jails.

Obama in November announced a program to allow roughly 4 million parents of U.S. citizens and legal permanent residents to apply for permission to stay in the country for up to three years and get a work permit. The program mirrors one announced in 2012 that provides protection from deportation for young immigrants brought to the country as children.

A spokesman for Customs and Border Protection, Carlos Diaz, said immigrants caught crossing the border illegally remain a top priority for the agency. The training documents for border agents, he said, “provide clear guidance on immigration enforcement operations so that both time and resources are allocated appropriately.”

Crystal Williams, executive director for the American Immigration Lawyers Association in Washington, said the training will help filter people the government said should not be a priority anyway. She said the training marked the first she has heard of officers being directed to screen immigrants for potential leniency before they were arrested.

“Just because it’s a change doesn’t mean it’s anything particularly radical,” Williams said.

Rep. Luis Gutierrez, an Illinois Democrat and vocal supporter of Obama’s immigration plans, said having CBP officers screen immigrants out of the deportation line lets the government “move criminals and recent arrivals to the front of the deportation line. The emphasis now is on who should be deported first, not just who can be deported.”

A former deputy assistant attorney general in the Justice Department, John Malcolm, said the new instructions limit immigration agents.

“Agents are being discouraged away from anything other than a cursory view” of an immigrant’s status and qualification for leniency, said Malcolm, who works as a senior legal fellow at the conservative Heritage Foundation think tank in Washington.

Under Obama’s plans, the government is focused on deporting immigrants with serious criminal records or who otherwise pose a threat to national security or public safety. For the most part, under the new policy, immigrants whose only offense is being in the country without permission aren’t supposed to be a priority for immigration officers.

While the administration has estimated that as many as 4 million people will be eligible for protection from deportation, the Congressional Budget Office estimated about 2 million to 2.5 million immigrants are expected to be approved for the program by 2017. As many as 1.7 million young immigrants were estimated to be eligible for the Deferred Action for Childhood Arrivals program, but since its 2012 creation only about 610,000 people have successfully signed up.

TIME Drones

Obama Calls for Drone Regulation After White House Crash

The FAA is currently drafting drone rules

President Barack Obama has used the crash-landing of a drone at the White House Monday as an opportunity to reemphasize the importance of regulating unmanned aircraft.

In an interview with CNN, Obama said the remote-controlled quadcopter that caused a brief security scare on Monday was the kind “you buy in Radio Shack,” calling for a regulatory framework for drones that will “get the good and minimize the bad.”

“There are incredibly useful functions that these drones can play in terms of farmers who are managing crops and conservationists who want to take stock of wildlife,” Obama said. “But we don’t really have any kind of regulatory structure at all for it.”

Drones are currently restricted from most airspace, except at low heights and at designated testing sites. The capital has stricter regulations than most on flying unmanned aerial vehicles.

The Federal Aviation Administration is currently drafting regulations that will allow for wider use of the devices. However, the process has been fraught with delays.

[CNN]

TIME India

Obama Pledges $4 Billion of Investment in India

U.S. President Barack Obama delivers a toast as he attends an Official State Dinner at the Rashtrapati Bhavan presidential palace in New Delhi
U.S. President Barack Obama delivers a toast as he attends an Official State Dinner with India's President Pranab Mukherjee and Prime Minister Narendra Modi at the Rashtrapati Bhavan presidential palace in New Delhi January 25, 2015. Jim Bourg—REUTERS

Half that amount will be set aside for India's renewable energy efforts

U.S. President Barack Obama pledged $4 billion in investment and loans to India on Monday, soon after attending the South Asian nation’s 66th annual Republic Day celebrations as the guest of honor earlier in the afternoon.

Obama told a gathering of business leaders from India and the U.S. that both countries have “got to do better” in furthering an economic relationship “defined by so much untapped potential,” Reuters reports.

The U.S. Trade and Development Agency will commit $2 billion towards India’s renewable energy efforts, Obama said, while $1 billion each will be pledged to finance “Made-in-America” exports and Indian rural businesses respectively.

[Reuters]

TIME White House

Obama Moves to Protect 12 Million Acres of Alaskan Wildlife

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Polar bears in the Arctic National Wildlife Refuge in Alaska. Getty Images

It would be the largest such designation in more than 50 years

The Obama Administration will ask Congress to protect millions of acres of land in Alaska from a range of human activity including drilling and road construction, officials said Sunday.

If approved by Congress, the move would designate more than 12 million acres as wilderness, the highest level of federal protection, and protect native wildlife including caribou, polar bears and wolves. It would be the largest such designation in more than 50 years.

“Designating vast areas in the Arctic National Wildlife Refuge as Wilderness reflects the significance this landscape holds for America and its wildlife,” Secretary of the Interior Sally Jewell said in a statement. “Just like Yosemite or the Grand Canyon, the Arctic National Wildlife Refuge is one of our nation’s crown jewels and we have an obligation to preserve this spectacular place for generations to come.”

The proposal will undoubtedly meet opposition in Congress. Alaska Republican Sen. Lisa Murkowski condemned the move immediately as an act of federal overreach.

“It’s clear this administration does not care about us, and sees us as nothing but a territory,” she said in a statement. “The promises made to us at statehood, and since then, mean absolutely nothing to them.”

TIME White House

White House Chief of Staff Reaffirms ‘Deep and Abiding’ U.S.-Israel Ties

Meet the Press - Season 68
Denis McDonough White House Chief of Staff appears on "Meet the Press" in Washington D.C. on Jan. 25, 2015. William B. Plowman—NBC/Getty Images

Amid reports of a rift with Israeli Prime Minister Benjamin Netanyahu

White House Chief of Staff Denis McDonough repudiated reports of a widening rift between the Obama administration and Israeli Prime Minister Benjamin Netanyahu on Sunday’s morning talk shows.

An unnamed administration official was quoted by Israeli newspaper Haaretz as saying Netanyahu “spat in our face publicly” when he agreed to accept an invitation to speak to the United States Congress in March without President Obama having been consulted first.

But McDonough said on NBC’s Meet the Press that the alliance between the U.S. and Israel remained strong. “Our relationship with Israel is many-faceted, deep and abiding,” he said. “It’s focused on a shared series of threats, but also, on a shared series of values that one particular instance is not going to inform overwhelmingly.”

The White House Chief of Staff said he could not “guarantee” that an administration official hadn’t made the remarks about Netanyahu, but said he had no idea who might have said them. “It’s not me. It’s not the President,” McDonough told interviewer Chuck Todd.

House Speaker John Boehner invited Netanyahu to deliver an address to a joint session of Congress when he visits the U.S. in March, without informing the White House first. The trip coincides with negotiations between the U.S. and others with Iran on their nuclear capabilities, which are strongly opposed by Israel and by some in Congress.

The White House said President Obama would not be meeting with Netanyahu during his visit, out of concerns that it might influence the Israeli elections due to take place two weeks after his trip.

The decision has been portrayed as a snub by the Israeli media, though McDonough said on Meet the Press that the principle would be the same for any other ally. “We think as a general matter we in the U.S. stay out of internal politics of our closest allies,” he said.

In a separate interview on ABC’s This Week Sunday, McDonough urged Congress not to pass new sanctions on Iran while the nuclear negotiations are ongoing.

“We’ve asked Congress for forbearance, for some time to allow us to run these negotiations so that it is we who are, united with our allies, maintaining Iran isolated, rather than going with some kind of premature action up there on the Hill that would risk really splintering the international community, making it we, not the Iranians, who are isolated,” he said.

TIME Morning Must Reads

Morning Must Reads: January 24

Capitol
The early morning sun rises behind the US Capitol Building in Washington, DC. Mark Wilson—Getty Images

Fuel’s Paradise

A majority of Americans are paying less than $2 per gallon for gas for the first time since 2009, and the ever-cheapening fuel is helping put more money in consumers’ pockets and bolster the economy

NASA Finds ‘Super Earths’

NASA’s Kepler Mission has found many planets in the “Goldilocks zone,” where it isn’t too hot or cold for water to exist

McDonald’s CEO Asks for Time

McDonald’s CEO Don Thompson cited a litany of actions the company is taking to reverse steep declines in sales

Federal Judge Strikes Down Gay-Marriage Ban in Alabama

A U.S. district judge ruled Friday in favor of two Mobile women who sued to challenge Alabama’s refusal to recognize their marriage performed in California. The judge said a state statute and 2006 amendment to the Alabama Constitution violated the U.S. Constitution

Big Storm Headed for the East Coast

A nor’easter could wreak havoc all along the East Coast this weekend, with a mix of rain and snow that will likely cause airline and traffic delays along the I-81 and I-95 corridors. Up to a foot of snow could accumulate in some locations

Obama to Cut Short India Trip to Visit Saudi Arabia

The schedule change, announced shortly before Obama left for India, means the president will skip plans to see the Taj Mahal, and instead pay a call on an influential U.S. ally in the volatile Mideast. Saudi Arabia’s King Abdullah died Friday at age 90

An Asteroid Will Fly Close to Earth on Monday

It doesn’t sound like a close shave, but in astronomical terms, it is. An asteroid will fly within 745,000 miles of Earth on Monday, NASA said, the closest a space rock will fly to Earth until 2027

Chicago Cubs Hall of Famer Ernie Banks Dies at 83

Ernie Banks, the Hall of Fame slugger and two-time MVP who always maintained his boundless enthusiasm for baseball despite decades of playing on miserable teams, died Friday night. He was 83

Emma Watson Launches New Anti-Sexism Initiative

Harry Potter star and U.N. Women Global Goodwill Ambassador Emma Watson unveiled the the HeForShe IMPACT initiative, a one-year pilot project geared toward advancing women by working with governments, companies and universities

Ebola Vaccines Get Tested in Liberia

The long-awaited vaccine for Ebola is heading to clinical trials in Liberia. Two vaccines, with the National Institutes of Health’s (NIH) support, will start efficacy testing in Liberia in the beginning of February

SkyMall Files for Bankruptcy

The parent company of in-flight shopping catalog SkyMall has filed for Chapter 11 bankruptcy, citing an increased prevalence of mobile devices on planes as the primary reason for the company’s flagging sales

Apple Store Chief Gets the Big Bucks

How much does Apple care about its retail stores? Enough to pay more than $70 million to the woman heading them up, making her the highest-paid exec at the company. Angela Ahrendts earned $73.4 million in 2014, almost all of it in stock awards

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