Bush's budget: How you may pay for the surplus

NEW YORK (CNNMoney.com) -- To achieve a budget surplus by 2012 while boosting spending on the military, President Bush has proposed curtailing domestic spending, permanently extending his tax cuts and only providing relief from the alternative minimum tax for one more year.

Each of those proposals could have a direct bearing on your wallet, in the short term as well as the long term.

Proposed budgets are never rubber-stamped, of course, and indeed the president's Fiscal Year 2008 budget has already come under sharp criticism from Democrats. But they do spur extended debate over the country's fiscal priorities.

So here's a look at a few of the president's proposed changes and their costs.

The president's budget calls for only one additional year of middle-class relief from the alternative minimum tax (for tax year 2007).

The projected cost in lost revenue: $36.5 billion over 10 years.

The cost of permanent repeal or reform would be many times that. The Tax Policy Center estimates that repealing the AMT would cost $851 billion between now and 2017, assuming the president's tax cuts are allowed to expire. If they're extended - pushing more people into AMT territory - the projected cost over 10 years rises to $1.6 trillion.

Federal budget projections assume that the AMT, which results in a higher tax bill, remains on the books. That assumption has made the long-term deficit look much lower than it would be if the tax were repealed or reformed.

The AMT, originally intended for the wealthy, now threatens to catch tens of millions of middle-income taxpayers, so it's highly unlikely that politicians will leave it unchanged. The Bush Administration and lawmakers on both sides of the aisle have expressed a desire to either permanently repeal or reform the AMT.

If no further legislation is passed, the number of taxpayers nabbed by the AMT will jump from 3.5 million in 2006 to 23 million for tax year 2007 and to 39 million by 2017, according the Tax Policy Center. That assumes the president's tax cuts expire as scheduled. If they don't, then 53 million taxpayers - or about half of all taxpayers - will pay the AMT by 2017.

Those hardest hit: married couples with kids who take a lot of the deductions and credits disallowed under AMT. The Tax Policy Center estimates that by 2010 nearly 90 percent of married couples with two or more children and an adjusted gross income between $75,000 and $100,000 will be subject to AMT.

The president proposes making his 2001 and 2003 tax cuts permanent, a move he asserts would keep the economy strong and push tax revenues higher.

Those tax cuts include reduced rates on capital gains and dividends, lower income tax rates, an increased child tax credit, partial marriage penalty relief and repeal of the estate tax.

The estimated cost: $1.6 trillion over 10 years.

"When Congress raises taxes, those costs are passed on to consumers in one form or another and have devastating consequences for our entire economy. [Raising taxes] will slow the economic growth that is creating the new jobs of tomorrow and increasing revenue to the federal government," said House minority leader John Boehner (R-Ohio) in an op-ed this weekend.

The Congressional Budget Office, which uses somewhat lower estimates of GDP growth and tax revenue receipts than the White House, estimates that if the president's tax cuts expired by 2011 as scheduled, AMT relief were made permanent and growth in discretionary spending (other than on Iraq and Afghanistan) kept pace with the nominal GDP growth rate, whatever surplus there might have been would result in a $328 billion deficit in 2012. In 2006, the deficit was $248 billion.

President Bush continues to call on lawmakers to reform spending on Social Security to correct for the system's long-term funding shortfall.

The $61 billion surplus projected in his budget assumes the Treasury will continue to use the incoming surplus from worker taxes paid into Social Security. Without that surplus, there would be a deficit in 2012, according to White House estimates.

In his budget, the president calls for the creation starting in 2012 of individual investment accounts - funded with a portion of a worker's Social Security taxes.

The estimated cost over 10 years: $637.4 billion.

Members of the Administration and the President's Commission to Strengthen Social Security have acknowledged that the creation of accounts doesn't address the system's long-term shortfall, and President Bush has leaned towards changing the way benefits are calculated in conjunction with the accounts.

Social Security experts agree that a combination of measures will probably be needed to achieve solvency in the system. Some of the measures discussed have included raising the retirement age slowly, reducing initial benefits for middle and upper income workers, and raising the cap on the amount of income subject to the Social Security tax.

Democrats have strongly opposed Bush's "carve out" accounts and declared them a non-starter in the debate over how to shore up Social Security. Meanwhile, Treasury Secretary Henry Paulson, whom the president asked to reach out to Democrats to come up with a bipartisan plan, said last week that chances are slim that lawmakers could agree on a way to reform Social Security during the remainder of Bush's term.

The president's budget calls for reduced funding for or outright termination of 141 discretionary spending programs for a projected savings of $12 billion in 2008.

"One of the ways we're achieving smart spending restraint is by closely examining each federal program to determine if it's a priority, whether it's effective in producing the intended results," said Rob Portman, director of the White House Office of Management and Budget in a briefing on Monday.

As mentioned in his State of the Union address, President Bush also is calling for a change in the way money spent on health insurance is taxed. His budget includes a new deduction for the purchase of health insurance for everyone. The deduction would be worth $7,500 for individual coverage and $15,000 for family coverage starting in 2009. (See what his health proposal means to you.)

Although the new deduction is projected to cost $121 billion over five years, it's projected to generate an additional $5 billion in revenue over 10 years.

The budget also calls for a number of measures to boost tax compliance, a move the White House estimates will recover $29.5 billion over the next 10 years from the "tax gap" - which is the difference between taxes owed and taxes paid to the IRS.

More on the $2.9 trillion budget

Bush touts energy, health plans

Paulson: Social Security reform prospects slim