Obama unveils first budget plan
Spending and tax outline proposes dramatic health care overhaul - vows to slash deficit, projected at $1.75 trillion in '09.
NEW YORK (CNNMoney.com) -- President Obama on Thursday pulled back the curtain on his first detailed vision of the federal budget, revealing an ambitious plan to reform health care and shift tax burdens while vowing to slash the deficit over the long run.
Obama has said repeatedly that his first fiscal plan would have a two-pronged mission: to reduce the $1 trillion-plus deficit he inherited to $533 billion by 2013 and make big investments in the future.
The administration estimates that the deficit for fiscal year 2009 will reach $1.75 trillion, or 12.3% of U.S. gross domestic product. That's a record in dollar terms and is the highest as a share of GDP since World War II.
"We will each and every one of us have to compromise on certain things we care about, but which we simply cannot afford right now. That's a sacrifice we're going to have to make," Obama said. "What I won't do is sacrifice investments that will make America stronger, more competitive and more prosperous in the 21st century."
The White House is calling for $3.6 trillion in spending in 2010, when it estimates that $2.4 trillion in revenue will be collected.
All estimates in the budget request are based on a set of economic assumptions made by Christina Romer, who heads the White House Council of Economic Advisers. She assumed real GDP would fall 1.2% this year -- with a significant drop in the first quarter. But she expects GDP growth of 3.2%, 4.0% and 4.6% over the next three years.
Romer believes unemployment will hit 8.1% this year and be only slightly less (7.9%) in 2010. But then she expects it to fall to 5% by 2014.
Obama's outline also reveals how much more money he and his economic team are setting aside to stabilize the financial system. Their estimate: $250 billion, which they believe would be the net cost of investing up to $750 billion in troubled assets. That would be on top of the $700 billion already authorized by Congress under the Troubled Asset Relief Program.
The document the White House delivered to Congress on Thursday is only a broad-stroke preview of the president's formal 2010 fiscal budget request, which is expected out in April. Lawmakers will spend the next several months debating and amending final legislation.
The Obama outline touches on the full scope of the federal government's spending and revenue collection efforts. Among the highlights, his budget request would:
Create a $634 billion health care reserve fund: The purpose of the fund would be "dedicated [to] financing reforms to our health care system," according to the budget outline. Among the fund's goals would be to aim for universality of coverage and reduce the growth in insurance premiums.
It would be paid for in two ways. The first, expected to raise $318 billion over 10 years, would limit how much of a deduction high-income taxpayers may take. Instead of reducing their tax liability by their top income tax rate, they wouldn't be allowed to reduce their bill by any more than 28%, which is below the top two tax rates. So for every $100 in deductions they take, they would reduce their tax liability by $28.
The second way Obama proposes to pay for the fund is to achieve health care savings by, among other things, reducing payments to private insurance companies offering Medicare and reducing prescription drug prices. The administration estimates these efforts could save $316 billion over 10 years.
The budget outline also notes the $634 billion fund is "not sufficient to fully fund comprehensive reform" but is a first step in the process.
"Our fiscal future is going to be determined by how health care costs grow," said Peter Orszag, director of the White House Office of Management and Budget.
Let tax cuts expire for high-income earners: To help reduce the deficit, the president's budget would allow the 2001 and 2003 tax cuts to expire for joint filers making more than $250,000 and single filers making more than $200,000 a year.
The tax increase would go into effect in 2011.
Specifically, the top two income tax rates would revert to 36% and 39.6%. Limits on how much high-income filers can claim in exemptions and deductions would be reinstated. And the capital gains tax rate would return to 20%, up from 15% currently. The dividend tax rate would also be 20%, but that's still less than high-income filers paid when dividends used to be taxed at ordinary income tax rates.
The White House estimates letting the cuts expire could raise $637 billion over 10 years, although Obama's desire to extend those same cuts for lower and middle income families is estimated to increase the deficit by more than $900 billion during the same period.
The impact of this change combined with the change on itemized deductions on high-income filers means wealthier tax filers will be putting significantly more Benjamins into the system.
According to estimates from Deloitte Tax, a married couple with 2 children under age 17 and income of $500,000 a year would owe approximately $11,300 more than under current law if all of the tax provisions in Obama's budget request outline were enacted.
Make permanent a number of tax breaks from stimulus: The president's budget seeks to make permanent the Making Work Pay credit worth up to $400 per worker ($800 per working family). It also seeks to make permanent the expansion of the child tax credit and the newly enlarged college credit now called the American Opportunity Tax Credit.
Assume middle class are protected from Alternative Minimum Tax: Every year lawmakers pass a "patch" to protect the middle class from having to pay the Alternative Minimum Tax. But the cost of that patch was not included in presidential budgets before. It is accounted for in Obama's budget.
Tax carried interest as income: Obama wants to tax the portion of profits paid to managers of hedge funds and private equity funds as ordinary income rather than as an investment gain, thereby subjecting it to much higher tax rates than the 15% capital gains rate. The provision is estimated to raise $24 billion over 10 years.
Change several corporate tax measures: In addition to the carried interest provision, the budget request includes roughly $306 billion worth of other revenue raisers that would come from closing corporate tax loopholes and changing some corporate tax and accounting rules.
One of those is a vaguely worded line item called "international enforcement, reform deferral and other tax reform policies." It is estimated to raise $210 billion in revenue over 10 years. It's not clear from the outline what changes are planned. Budget experts say a likely candidate for that category would be a change to a current policy that lets U.S.-based companies defer paying tax on the profits its foreign subsidiaries make until the money is brought back to the United States.
Reduces subsidies to big farms: The budget strengthens limits on direct payments to farms with sales over $500,000. The provision is estimated to raise $10 billion over 10 years.
Commit more money for renewable energy efforts: Obama's budget will call on Congress to create a cap-and-trade program in which companies would have to pay for permission to emit greenhouse gases. Revenue from the program is intended to pay for a $150 billion renewable energy fund among other things.