Obama offers $3 trillion debt plan, tax hikes on rich

Updated: 2011-09-20 06:23


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 Obama offers $3 trillion debt plan, tax hikes on rich

U.S. President Barack Obama gestures as he talks about cutting the U.S. deficit by raising taxes, from the Rose Garden of the White House in Washington, September 19, 2011. [Photo/Agencies] 

WASHINGTON - U.S. President Barack Obama laid out a $3.6 trillion plan on Monday to cut U.S. budget deficits partly by raising taxes on the rich, but Republicans rejected it as a political stunt and made clear the proposal has little chance of becoming law.

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Here are highlights of Obama's deficit reduction plan.


The plan would raise nearly $1.6 trillion from changes to the U.S. tax code. Of that, $866 billion in savings would come from allowing President George W. Bush's tax cuts for individuals making more than $200,000 to expire.

An additional $710 billion would come from ridding the tax code of special breaks. Obama has proposed limiting deductions for higher-income households and eliminating breaks for oil and gas companies and firms that purchase corporate jets.

The plan would also boost taxes on certain income earned by fund managers often called "carried interest." Hedge fund managers and some others pay a lower capital gains tax rate for managing clients' investments.

In a populist step designed to appeal to voters, Obama would require millionaires to pay higher taxes. He has called that idea the "Buffett Rule" because it is based on a suggestion put forth by billionaire Warren Buffett, an ally of the president. Buffett has written that rich people like himself often pay less in tax than those who work for them because of tax-code loopholes and the low rates he pays on his investment income.


Obama's plan includes $580 billion in cuts to domestic spending programs. Of that, $248 billion will come from savings in the Medicare health program for older Americans with most of the cuts targeting payments mainly to insurance companies and hospitals.

Obama would seek savings of $72 billion in the Medicaid health program for the poor.

Administration officials said Obama will pledge to veto any plan that would cut benefits for Medicare recipients unless the wealthy and big corporations are required to pay their "fair share" of taxes.

In a decision that is likely to please many Democrats, Obama is not proposing raising the age at which Americans become eligible for Medicare benefits, currently set at 65.

He also is not proposing any changes to Social Security.

The plan includes $250 billion in savings from other mandatory programs, including $33 billion in savings from agriculture subsidies, payments, and programs. It also includes $42.5 billion in reforms to federal employee benefit programs.


The plan proposes a 10 basis point increase in "guarantee fees" that Fannie Mae and Freddie Mac charge to mortgage customers, to produce projected savings of $28 billion over 10 years. The White House has backed increasing guarantee fees as part of a way to lessen the government's footprint in the U.S. housing finance system.


The plan assumes $1.1 trillion in savings from winding down the war in Iraq and moving ahead with planned troop reductions from Afghanistan. Critics have labeled this element of the plan a gimmick because it does not represent new policy but instead reflects drawdowns of U.S. forces that have already been announced.


Obama's plan includes a reform of the postal system, which has been facing a funding crisis. "These reforms would provide U.S. Postal Service with over $20 billion in cash relief over the next several years and in total would reduce the federal deficit by $19 billion over 10 years," according to the plan.


The plan assumes $430 billion in savings on interest payments because of the cuts elsewhere in the budget.

Vowing to veto any plan that relies solely on spending cuts to reduce deficits, the Democratic president's recommendations set the stage for an ideological fight with Republicans opposed to tax increases that will stretch through Election Day 2012.

"I will not support any plan that puts all the burden of closing our deficit on ordinary Americans," Obama said. "We are not going to have a one-sided deal that hurts the folks who are most vulnerable."

Obama's speech reflected a more aggressive defense of Democratic principles after he took a battering in two previous budget battles with Republicans this year that helped drive his approval rating to new lows.

Most Americans say they are unhappy with Obama's economic leadership, and the president's re-election hopes could hinge on his ability to convince voters that Republicans represent the rich, not the middle class.

On Monday, he repeatedly said all Americans must pay their "fair share" of taxes, and he sharpened the difference between his vision for America and that of Republicans in a speech meant to regain support among core supporters who have said Obama has failed to stick to liberal principles.

Republicans have consistently opposed any measures resembling tax hikes, saying they will hurt the struggling economy by increasing the burden on job-creating businesses. Republican leaders stuck to that position on Monday, quickly rejecting Obama's plan.

"Veto threats, a massive tax hike, phantom savings, and punting on entitlement reform is not a recipe for economic or job growth," said Republican Senate leader Mitch McConnell.

John Boehner, speaker of the House of Representatives and the top Republican in Congress, said Obama failed to offer a "serious" recommendation to the special bipartisan congressional committee tasked with finding at least $1.2 trillion in savings.

"Pitting one group of Americans against another is not leadership," Boehner said.

Politics, but a plan?

Analysts were skeptical Obama's plan would help America's standing with credit rating agencies such as Standard & Poor's, which last month downgraded U.S. government debt and expressed concern that Washington was too divided to tackle its mountain of debt.

Obama's plan, which will be sent to the "super committee" of six Republicans and six Democrats considering deficit reduction, proposes $3 trillion in savings over 10 years.

These include cuts to Medicare spending aimed mainly at healthcare providers, particularly big drug companies, and some hospital stocks fell sharply on Wall Street on Monday.

But roughly half of overall savings come from higher tax revenues, under the president's proposal.

That would include allowing tax breaks for upper income Americans to expire at the end of 2012, capping popular deductions for things like mortgage interest and charitable donations, and closing corporate tax loopholes.

"This is purely politics, aimed at Obama's demoralized base. It undoubtedly has been poll-tested, so now Obama has a populist campaign issue. There's obviously no chance this could pass" on a vote in Congress, said Greg Valliere, chief political strategist at consultancy Potomac Research Group.

Rudolph Penner, a former director of the Congressional Budget Office, said rating agencies would not be impressed by Obama's failure to recommend deeper healthcare cuts.

"If I were S&P I would not change my rating on the basis of this proposal," he said.

"Buffett rule"

Obama's call to overhaul the U.S. tax code included a "Buffett Rule," named after billionaire investor Warren Buffett, that would set a minimum tax rate for people earning more than $1 million a year.

The tax would only apply to a tiny minority of the millions of Americans who file tax returns, but White House aides said it would set a standard of fairness.

Senior Senate Democrat Charles Schumer said Congress should run with the "Buffett Rule" and urged lawmakers put it into legislation that could be voted upon.

While critics derided Obama's plan as purely political, some analysts saw a sober bid to tackle big fiscal problems.

"Obama's new plan is both a serious legislative proposal and an effort to stake out his ground for his re-election campaign," said Sarah Binder, a senior fellow at The Brookings Institution, although she said Republicans' resistance to tax hikes would likely thwart a compromise.

The super committee must propose a deficit plan by Nov. 23. Congress must then vote on the panel's proposal by Dec. 23 or automatic spending cuts will be triggered across government agencies, beginning in 2013.

Palatable to be left

Obama said his plan, together with savings agreed under an August debt ceiling deal, will cut $4 trillion from the deficit over 10 years, helping deflect Republican claims he is a "tax and spend liberal" that have hurt him with independent voters.

Obama's suggestions do not raise the eligibility age for Medicare recipients, something he proposed during debt ceiling negotiations with Boehner over the summer.

Instead, he is proposing something more palatable to the left wing of his party -- $248 billion in savings from Medicare, the government health program for the elderly. The bulk of that would come from reducing overpayments to health care providers.

Medicare and Medicaid are viewed by analysts as the biggest contributors to long-term U.S. deficits, a driving issue in the election. The U.S. budget deficit in 2011 is expected to be about $1.3 trillion.