President Obama outlined his plan for reducing the budget deficit by $4 trillion in the next 12 years during a speech Wednesday in which he said taxes would need to be raised on the wealthy and itemized deductions limited.

Obama urged Congress to let the recently extended Bush-era tax cuts expire for upper-income individuals when they end in late 2012. “My budget calls for limiting itemized deductions for the wealthiest 2 percent of Americans—a reform that would reduce the deficit by $320 billion over ten years,” he said. “But to reduce the deficit, I believe we should go further. That's why I’m calling on Congress to reform our individual tax code so that it is fair and simple—so that the amount of taxes you pay isn’t determined by what kind of accountant you can afford. ”

Obama acknowledged that some itemized deductions made sense. “While I agree with the goals of many of these deductions, like homeownership or charitable giving, we cannot ignore the fact that they provide millionaires an average tax break of $75,000 while doing nothing for the typical middle-class family that doesn’t itemize,” he said.

He said that he agreed last December to extend tax cuts for the wealthy, but said it was the only way he could prevent a tax hike on middle-class Americans. “But we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society,” he added. “And I refuse to renew them again.”

However, Obama reaffirmed his intention to reform the Tax Code for individuals and businesses. “I believe reform should protect the middle class, promote economic growth, and build on the Fiscal Commission's model of reducing tax expenditures so that there is enough savings to both lower rates and lower the deficit,” he said. “And as I called for in the State of the Union, we should reform our corporate tax code as well, to make our businesses and our economy more competitive.”

Obama sharply criticized the Republican plan introduced last week by House Budget Committee Chairman Paul Ryan, R-Wis. Ryan’s budget resolution calls for cutting the top tax rate on individuals and corporations from 35 to 25 percent, while privatizing Medicare with “premium supports” paid to insurance companies, and turning Medicare into a block grant program.

“It’s a vision that says America can’t afford to keep the promise we've made to care for our seniors,” said Obama. “It says that 10 years from now, if you’re a 65 year old who’s eligible for Medicare, you should have to pay nearly $6,400 more than you would today. It says instead of guaranteed health care, you will get a voucher. And if that voucher isn't worth enough to buy insurance, tough luck—you’re on your own. Put simply, it ends Medicare as we know it. This is a vision that says up to 50 million Americans have to lose their health insurance in order for us to reduce the deficit. And who are those 50 million Americans? Many are someone’s grandparents who wouldn’t be able to afford nursing home care without Medicaid. Many are poor children. Some are middle-class families who have children with autism or Down's syndrome. Some are kids with disabilities so severe that they require 24-hour care. These are the Americans we'd be telling to fend for themselves.”

Obama contrasted those spending cuts in Medicare and Medicaid with the tax breaks that would go toward the wealthy if the top tax rate were reduced by 10 percentage points. “Worst of all, this is a vision that says even though America can’t afford to invest in education or clean energy; even though we can't afford to care for seniors and poor children, we can somehow afford more than $1 trillion in new tax breaks for the wealthy,” he said. “Think about it. In the last decade, the average income of the bottom 90 percent of all working Americans actually declined. The top 1 percent saw their income rise by an average of more than a quarter of a million dollars each. And that’s who needs to pay less taxes? They want to give people like me a $200,000 tax cut that’s paid for by asking 33 seniors to each pay $6,000 more in health costs? That’s not right, and it’s not going to happen as long as I'm President. The fact is, their vision is less about reducing the deficit than it is about changing the basic social compact in America. As Ronald Reagan's own budget director said, there’s nothing ‘serious’ or ‘courageous’ about this plan. There's nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires. There’s nothing courageous about asking for sacrifice from those who can least afford it and don’t have any clout on Capitol Hill. And this is not a vision of the America I know.”

Obama said his tax reform plans would cut about $1 trillion over the next 12 years. He also plans about $2 trillion in spending cuts over the next 12 years, in part by carrying out the spending cuts agreed to last weekend during negotiations with congressional leaders. Those cuts would amount to about $750 billion over 12 years. Other cuts would come from defense spending in coordination with the Defense Department and the Joint Chiefs of Staff. Obama said the new health care reform law would reduce the deficit by $1 trillion and he would build on the reforms by reducing wasteful subsidies and erroneous payments, while using Medicare’s purchasing power to cut spending on prescription drugs. Other reforms would demand more efficiency and accountability from Medicaid. He predicted those reforms would save another $500 billion by 2023 and an additional $1 trillion in the following decade. An independent commission would be given the authority to realize additional savings for further improving Medicare.

Republicans said they would oppose tax increases. “Tax policies designed to increase revenues for more government spending will not help these hometown business leaders create new jobs that can attract and retain talent and vitality in those small towns,” said Sen. Charles Grassley, R-Iowa. “What is more, raising federal tax rates would stunt the positive ripple effect that occurs in the local economy and in the local tax base when small businesses are able to grow and expand their sales output and profits.”

“The fiscal crisis we face won’t be solved by ‘freezing’ unsustainable government spending, or by raising taxes on the very small businesses we are counting on to create jobs,” said Senate Minority Leader Mitch McConnell, R-Ken. “And the programs we cherish as Americans won’t be preserved for the next generation through speeches alone.”

Neal Weber, the head of McGladrey’s Washington National Tax Office, expects to see a dispute at the end of 2012 similar to the tax cut dispute that erupted at the end of last year as the tax cuts again expire. “President Obama has drawn a line in the sand between Republicans and his point of view,” Weber said in an interview. “In his 2012 budget proposal, he had talked about limiting itemized deductions for the taxpayers in the highest income brackets and I think now he is going a little bit further in terms of talking about curtailing some of the largest tax expenditures, which would include mortgage interest deductions and charitable contributions.”


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