Obama Budget Aims to Reform Taxes and Entitlements

President Barack Obama formally unveiled the administration’s fiscal 2014 budget on Wednesday with some familiar proposals for tax reform, along with key concessions on entitlement reform.

Some of the proposals, for controlling spending on Medicare and Social Security by using a formula known as “chained CPI” tied to the Consumer Price Index, had already been floated by the administration, and would also have an effect on the calculation of tax brackets (see Obama Budget to Include Tax Bracket Changes). The proposal had come under consideration during earlier negotiations with Speaker of the House John Boehner, R-Ohio, on raising the debt ceiling. However, they are opposed by many Democratic lawmakers who worry that it would cut benefits for future retirees. Obama’s budget proposal would soften the impact on low-income retirees and no current beneficiaries would see their benefits reduced. The changes in Medicare are estimated to save $305 billion over 10 years.

Another proposal previewed last week by the Obama administration would limit the size of individual retirement accounts, prohibiting taxpayers from accumulating more than $3 million in an IRA (see Obama’s Budget Would Cap Romney-Sized Retirement Accounts).

Other proposals appeared in earlier budget blueprints from the Obama administration, including the so-called Buffett Rule, named after billionaire investor Warren Buffett, to ensure that the wealthy pay a minimum tax rate.

“I believe that in our country, everyone must shoulder their fair share—especially those who have benefited the most from our economy,” Obama said in a message accompanying the budget plan. “In the United States of America, a teacher, a nurse, or a construction worker who earns $50,000 a year should not pay taxes at a higher rate than somebody making $50 million. That is wrong. It is wrong for Warren Buffett’s secretary to pay a higher tax rate than Warren Buffett. This is not about class warfare; this is about the Nation’s welfare. This is about making fair choices that benefit not just the people who have done fantastically well over the last few decades, but that also benefit the middle class, those fighting to get into the middle class, and the economy as a whole.”

Despite the fiscal cliff deal at the end of last year extending many of the current tax rates, Obama reiterated his opposition in his budget plan to permanently extending the Bush tax cuts for families making more than $250,000 a year and his opposition to a more generous estate tax than in 2009 benefiting only the very largest estates.

“These policies were unfair and unaffordable when they were passed, and they remain so today,” he said. “I will push for their expiration in the coming year. I also propose to eliminate special tax breaks for oil and gas companies; preferred treatment for the purchase of corporate jets; tax rules that give a larger percentage deduction to the wealthiest two percent than to middle-class families for itemized deductions; and a loophole that allows some of the wealthiest money managers in the country to pay only 15 percent tax on the millions of dollars they earn. And I support tax reform that observes the ‘Buffett Rule’ that no household making more than $1 million annually should pay a smaller share of its income taxes than middle-class families pay.”

Obama released his budget plan later than usual, after House Republicans and Senate Democrats already passed competing budget blueprints in both chambers (see Senate Democrats Pass Budget with Tax Increases and House GOP Passes Paul Ryan’s Budget Plan). The prospects for Obama’s budget plan are murky. Congress has failed to pass an annual budget for four years.

However, in a key concession to Republican lawmakers, Obama has included reforms to Medicare, Medicaid and Social Security in his budget. “To build on the work we have done to reduce health care costs through the Affordable Care Act, I am proposing more than $360 billion in reforms to Medicare, Medicaid, and other health programs over 10 years,” he said. “The goal of these reforms is to make these critical programs more effective and efficient, and help make sure our health care system rewards high-quality medicine. What it does not do—and what I will not support—are efforts to turn Medicare into a voucher or Medicaid into a block grant. Doing so would weaken both programs and break the promise that we have made to American seniors, people with disabilities, and low-income families—a promise I am committed to keeping.”

Other provisions would extend tax cuts for research and development and cut taxes for small businesses. Among the proposals for small businesses are expanding and making permanent the elimination of taxes on capital gains for key small business investments, providing a 10 percent income tax credit on new payroll for small businesses in 2012 (through either or increased wages), expanding and simplifying a tax credit for small businesses that provide health care to their workers and doubling the amount of start-up expenses entrepreneurs can deduct. President Obama is also proposing to extend 100-percent first year depreciation into 2012, giving firms an incentive for investing in plants and equipment now.

However, the likelihood of a budget compromise with Republican lawmakers is uncertain. Boehner dismissed Obama’s plan in a news conference with fellow Republican leaders on Wednesday.

“House Republicans passed a balanced budget that will help foster a healthier economy and to help create jobs,” he said.  “Unfortunately, the President’s budget never comes to balance. Every family has to balance its budget, Washington should as well. The American people know you can’t continue to spend money that you don’t have.  The federal government has spent more than what it has brought in in 55 of the last 60 years.  Now think about this, you can’t continue to go on like this. That’s why we came forward with a plan that will balance the budget over the next 10 years.  We believe strongly that it is time for Washington to deal with its spending problem.” 

Boehner, however, had cautious praise for Obama’s entitlement reform proposals. “And while the President has backtracked on some of his entitlement reforms that were in conversations that we had a year and a half ago, he does deserve some credit for some incremental entitlement reforms that he has outlined in his budget,” he said. “But I would hope that he would not hold hostage these modest reforms for his demand for bigger tax hikes. Listen, why don’t we do what we can agree to do? Why don’t we find the common ground that we do have and move on that? The President got his tax hikes in January. We don’t need to be raising taxes on the American people. So I’m hopeful in the coming weeks we’ll have an opportunity, through the budget process, to come to some agreement.”

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