The President would pay for the proposals by increasing increased taxes on capital gains and dividends; closing the "trust fund loophole," and imposing a new tax on borrowing by the largest banks and financial firms, those with assets over $50 billion. The White House indicated that these "loophole" closers would raise $320 billion over 10 years.

Relief for Families

Obama proposed to triple the maximum child and dependent care credit for qualifying families with children under five. Families could claim a 50-percent credit for up to $6,000 of expenses per child under age five. Existing enhancements to the EITC would be made permanent, and the credit would be expanded to taxpayers without children and to noncustodial parents.

For education credit, the President proposed to make the American Opportunity Tax Credit (AOTC) permanent and to increase the refundable portion to $1,500. A partial credit would be available to part-time students, and all eligible students could claim the AOTC for five years. However, earnings on contributions to Code Sec. 529 education plans would no longer be tax-exempt.

The President proposed to provide additional tax relief to small businesses that offer a new retirement plan, such as a 401(k) plan, or that start automatically enrolling workers in their plan. Tax credits would also be available to offset administrative costs. Employers who do not offer a retirement would be required to offer an automatic IRA savings vehicle.

Taxes on the Wealthy

The President's proposals would increase the top tax rate on capital gains and dividends from 23.8 percent to 28 percent. An estate tax proposal would eliminate stepped-up basis at death (labeled the trust fund loophole) for inherited assets to the extent of capital gains of $200,000 or more per couple, with an additional $500,000 exemption for personal residences. The proposals would impose a 7 basis point fee on the liabilities on the roughly 100 largest financial firms. (Presumably, the 3.8 percent net investment income tax would no longer apply to capital gains and dividends subject to the higher tax rates.)