Obama would allow the lower Bush tax rate of 35 percent to expire, bringing the tax rate back up to 39.6 percent for families earning more than $250,000 annually. His proposal would limit the reach of the Alternative Minimum Tax, a problematic tax Congress regularly has to “patch” at the end of the year because, while originally intended to ensure that the wealthy pay a minimum amount, the tax increasingly ensnares middle-class payers. But Obama would still employ an AMT-like tax by limiting the rate at which individuals can reduce their tax burden through deductions to a 28 percent income-tax liability. That measure would bring in an estimated $500 billion over 10 years.
The proposal would also raise the estate tax and the gift tax to 2009 levels of 45 percent over a given threshold — the first $3.5 million of an individual’s estate, and the first $1 million of a gift, would be exempt — to raise nearly $250 billion over 10 years. He would raise the capital-gains tax to 20 percent, ending the preferential Bush-era rate of 15 percent.
Altogether, the budget’s tax proposals would raise some $2 trillion more than if current tax policies were simply extended for 10 years. Obama is more specific than the budget plan being pushed by Rep. Paul Ryan, R-Wis., about the tax expenditures he would end (like the preferential capital-gains rate), but he hasn’t made any move to go after the breaks where the real money is, like the mortgage-interest deduction.
Obama would lower the corporate tax rate to 28 percent, according to a separate corporate tax reform proposal he released in February, and he would implement a minimum tax on overseas earnings. He would also get rid of various business tax deductions and give a 20 percent income-tax credit for businesses that move jobs back to the United States.
SEQUESTRATION/LONG-TERM DEFICIT REDUCTION:
Like Ryan, Obama wasn’t happy to leave the Budget Control Act — passed with the debt-ceiling increase last year — alone in his budget. The law, if allowed to take effect, would trim the deficit by $2.3 trillion over 10 years through a combination of annual spending caps and automatic across-the-board cuts, split evenly between defense and nondefense programs.
Obama’s proposal would remove the firewall between the caps on defense and nondefense annual spending, and its proposal for the next fiscal year actually transferred some money from nondefense to defense programs. Still, Republicans have attacked Obama for failing to address the nearly $500 billion in defense spending cuts over 10 years set to take effect in January.
DEFENSE: The president’s proposal would implement defense cuts totaling nearly $500 billion over a decade.
SOCIAL SECURITY: Like the Ryan proposal, Obama’s budget made no changes to Social Security.
HEALTH CARE:The president’s plan relies on his health care law for most savings, counted in the form of lower drug costs, limited procedural and equipment payments, and the suggestions of the Independent Payment Advisory Board. The most recent estimate of the law’s costs and savings, released after the Supreme Court’s decision, found that it would be $84 billion cheaper over 10 years, now that states are allowed to opt out of the Medicaid expansion.
MEDICARE: Obama’s budget counts about $150 billion in fees from drug manufacturers participating in Medicare Part D over 10 years; the plan would also reduce the growth in provider payments and increase premiums for high earners.
MEDICAID: The budget counts about $50 billion in Medicaid savings, largely from streamlining state matching rates.
PROGRAMS THAT HELP THE POOR: Obama took heat from members of his own party for his proposal to dramatically reduce funding for a program that gives heat and energy assistance to the poor; but for the most part, the plan stays away from low-income assistance programs.
FINANCIAL-SERVICES REFORMS: The president’s plan would increase funding for financial regulators, requesting more than $2 billion for the next fiscal year to implement the Dodd-Frank financial-reform law.
ENERGY POLICY: Obama’s plan would dramatically increase energy funding, to the tune of more than 40 percent over current levels. It would direct much of the money to research and development of clean-energy technologies, programs that fund energy studies, and research on nuclear waste. Energy-efficiency initiatives and incentive programs would also receive higher funding.
The budget would repeal $4 billion worth of tax subsidies that oil companies receive each year and cut nearly $100 million in funding for clean-coal initiatives. Obama has also delayed development of the Keystone XL pipeline, calling for a more thorough review of the project’s potential repercussions.
Obama would marginally decrease funding for the Environmental Protection Agency (by about 2 percent), continuing the trend of his previous two budgets. The plan would cut funding for nonemergency hazardous waste, while increasing spending on air quality. It would also streamline grant programs for state and local governments.
Rep. Paul Ryan
TAXES: Rep. Paul Ryan's plan would consolidate the current six individual income tax brackets into two, set at 10 percent and 25 percent, though the plan isn’t clear on how those rates would be applied, income-wise. He insists the plan will be revenue neutral -- that the government will not lose any money coming into its coffers -- because he would scrub the complicated tax code of unspecified breaks and subsidies. The biggest 20 breaks -- including the exclusion of employer health insurance and the massively popular mortgage-interest deduction -- make up 90 percent of the $1.1 trillion in revenue lost each year to the roughly 200 “tax expenditures” currently on the books.
This is where the criticism that Ryan would raise taxes on the lower and middle classes in order to cut them for the rich comes into play: Many of the top breaks benefit the middle class along with the wealthy, and the one that almost exclusively benefits the wealthy, the lower 15 percent capital gains rate for returns on investments, is one Ryan has made clear he wouldn’t touch -- and might even lower more dramatically. Republicans point out that since 50 percent of people do not pay income taxes, they will not be affected by the removal of expenditures, even though 11 percent of the breaks go to lower-income individuals
Ryan also would repeal the alternative minimum tax -- a tax originally intended to ensure that the wealthy pay a minimum amount that both sides now concede ensnares middle-class payers -- rather than continue short-term fixes, as Congress traditionally does at the end of the year. On the corporate side, Ryan would lower the rate from 35 percent to 25 percent and exclude foreign income.
He promises to keep federal revenues consistent with the historical average of 18 percent to 19 percent of gross domestic product; they are currently expected to comprise 15.8 percent of the economy this year, largely because of the weakened economy.
SEQUESTRATION/LONG-TERM DEFICIT REDUCTION: Ryan has never supported the defense part of the automatic spending cuts spurred by the failure of the “super committee” of 12 members of Congress who were supposed to find $1.2 trillion in deficit reduction over a decade. The across-the-board spending cuts -- or “sequesters” in Washington-speak -- set to go into effect at the start of 2013 would be evenly split between defense and nondefense spending and total $1.2 trillion.
Ryan’s budget farmed out instructions to other committees to replace the 10 years of defense cuts by cutting additional domestic spending. The cuts to “mandatory spending” -- spending on things such as health care that do not get passed each year by Congress -- would reach the vicinity of $250 billion over 10 years.
Domestic cuts next year alone in “discretionary” spending -- the spending passed each year by Congress for programs to keep the government running --would hit $27 billion, in order to offset the increase in defense spending and still cut the overall budget for the year.
Democrats’ position is that while both parties are in favor of replacing across-the-board cuts with more considered policy, Republicans’ shift of money from domestic programs to defense amounts to targeting the most vulnerable members of society, since savings would be wrung from programs such as food stamps.
DEFENSE: He would not only void the scheduled cuts, but increase defense spending for the next year by $8 billion, to $554 billion, excluding war spending.
SOCIAL SECURITY: Like President Obama, Ryan stayed away from Social Security reforms. His 2008 plan included suggestions, but he dropped them after hearing concerns from fellow GOP House members.
HEALTH CARE: The House-adopted package of long-term budget reforms counts more than $150 billion in spending cuts for health care programs over the next decade, mainly through the implementation of malpractice reform and defunding of many large parts of Obama’s health care law.
MEDICARE: There would be no change for anyone enrolled before 2023 -- one of the reasons many of the budget’s hypothetical savings wouldn’t kick in until after the 10-year period by which budgets are usually measured. After that, the eligibility age would increase gradually until it reached 67 in 2034. The budget Ryan produced this spring would introduce a competitive-bidding system and would allow seniors to choose between traditional Medicare and a subsidy from the government to purchase a private plan. Last year, there was no option to maintain traditional Medicare’s fees for services. It’s a concession Ryan made when he crafted a new Medicare plan with Sen. Ron Wyden, D-Ore., last December. The cost-growth formula is also more generous this year than it was last year, but the over-all reform plan is still the most dramatic approach currently in circulation.
MEDICAID: Ryan's plan would convert Medicaid to a block-grant system administered by the states and cap spending growth at a rate determined by inflation and population growth. It would undo rules from the health care law requiring states to keep everyone who received Medicaid benefits in 2010 on support through 2014 and void scheduled expansion of coverage for most non-elderly people with incomes less than about 140 percent of the poverty level. It would also limit the taxes states can charge Medicaid hospitals and doctors and the extra Medicaid payments for hospitals that treat large numbers of uninsured patients.
PROGRAMS THAT HELP THE POOR: The package would cut an additional $50.4 billion over 10 years from non-Medicaid programs that help the poor. It would eliminate a block grant designed to send federal funding to state social services programs; end yearly increases in funding for food stamp education programs and end the increase in food stamp money included in Obama’s stimulus. If the package were implemented, it would also be harder to qualify for food stamp assistance. Some of that money has now already been spent, so the $50.4 billion figure is now slightly high, but these cuts are a huge issue for Democrats, so expect to hear a lot about them.
FEDERAL EMPLOYEE PENSIONS: By raising the amount that federal employees contribute to their pensions and eliminating supplemental benefits given to early retirees until they reach the Social Security retirement age, the package would generate more than $80 billion.
FINANCIAL-SERVICES REFORMS: The package counts $35 billion in savings from easing up financial regulation included in the Dodd-Frank reform law. Ryan would also gradually phase out government control of Fannie Mae and Freddie Mac.
ENERGY POLICY: Ryan's plan would significantly weaken energy regulation, decrease funding for the Environmental Protection Agency, lift bans on projects like the Keystone pipeline, and end the Energy Department's loan guarantees.