State of the Union: Obama to Tax Rich to Save Economy

(Reuters) - President Barack Obama has called for higher taxes on the rich and new remedies for the US mortgage crisis in a starkly populist State of the Union address aimed at convincing voters to give him a second term.

Speaking to Congress, Obama proposed sweeping changes in the tax code - most notably, a minimum 30 percent effective rate on millionaires - to eliminate inequalities that allow the wealthy to pay lower rates than the middle class.

While the biggest proposals in Obama's election-year speech are considered unlikely to gain traction in a divided Congress, the White House believes the president can tap into voters' resentment over Wall Street excesses and Washington's dysfunction.

Obama's message could resonate in the 2012 campaign following the release of tax records by Mitt Romney, a potential Republican rival and one of the wealthiest men to ever run for the White House. He pays a lower effective tax rate than many top wage-earners.

A new proposal outlined by Obama to ease the way for more American homeowners to get mortgage relief - and to pay for the plan with a fee on banks blamed for helping create the housing crisis - also struck a strong note of populism.

Millions of Americans who work hard and play by the rules every day deserve a government and a financial system that does the same, Obama told a joint session of Congress. It's time to apply the same rules from top to bottom.

Taxes are the most divisive issue at the heart of this year's presidential campaign when Obama is seeking re-election despite a slow economic recovery and a high jobless rate.

Democrats have hammered Republicans in Congress for supporting tax breaks that favor the wealthy while Republicans staunchly oppose tax hikes, even on the richest Americans, arguing they would hurt a fragile economic recovery.

House of Representatives Speaker John Boehner, the top congressional Republican, accused Obama beforehand of promoting the politics of envy and insisted the election would be a referendum on the president's failed policies.

The US unemployment rate was 8.5 percent in December. No president in the modern era has won re-election with the rate that high.

Obama used the speech to revive his call to rewrite the tax code to adopt the so-called Buffett rule, named after the billionaire Warren Buffett, who says it is unfair that he pays a lower tax rate than his secretary.

Those making more than $1 million a year would pay a minimum effective tax rate of at least 30 percent and their tax deductions would be eliminated under Obama's plan.

To underscore Obama's point about tax inequality, Buffett's secretary, Debbie Bosanek, was to be seated in the first lady's box in the House of Representatives for Obama's annual address.

Seeking to capitalise on a high-profile platform to draw contrasts with his Republican challengers, Obama also rolled out proposed corporate tax reforms, including a minimum rate on companies' overseas profits and a tax credit for moving jobs back home.

Taking aim at China - an election-year target of Republicans and Democrats alike over its currency and trade practices - Obama proposed creation of a new trade enforcement unit within the federal government.

Promising what amounts to a peace dividend, Obama also proposed using half of the savings from ending the war in Iraq and winding down in Afghanistan to pay down U.S. debt, with the other half going to fixing decaying infrastructure like roads and railways.

According to Congressional Budget Office estimates, savings from the wars would result in about $440bn less in spending in 2012-21.

On the housing front, Obama said he would send to Congress a proposal to allow more Americans take out new and cheaper mortgages as long as they are current on their payments, savings that would amount to $3,000 per household each year.

Blaming banks for helping to cause the housing crisis in the first place, Obama told Congress that financial institutions would be asked to cover the cost of the plan via a proposed bank fee.

Record-low interest rates have already spurred many US homeowners to refinance their mortgages, but the housing crisis continues to drag on the U.S. economic recovery.

While these initiatives do not offer a quick fix for high unemployment that threatens Obama's re-election prospects, his speech was a chance to take control of the campaign narrative amid saturation coverage of the volatile Republican race.

Although Obama is fully aware of the legislative obstacles, his aides see this approach scoring political points by turning up the heat on Republicans he accuses of obstructing economic recovery.

We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by, Obama said. Or we can restore an economy where everyone gets a fair shot, everyone does their fair share.