Bloomberg News

Obama Calls for Trimming Deficit With $1.5 Trillion in Taxes

September 19, 2011

(Updates with Geithner remarks in interview in 21st-24th paragraphs.)

Sept. 19 (Bloomberg) -- President Barack Obama cast himself as a champion of “fairness” for the middle class in the fight to reduce the deficit with a call for $1.5 trillion in tax increases over the next decade, largely targeting the wealthy.

Obama joined his call for a tax increase with a threat to veto any legislation Congress sends him that would reduce benefits from the Medicare health-insurance plan for the elderly unless wealthy Americans also face higher taxes.

“This is not class warfare, it’s math,” Obama said this morning at the White House as he unveiled his recommendations to a 12-member congressional committee charged with finding ways to trim at least $1.5 trillion from the deficit. “The money’s going to have to come from someplace.”

The stance places Obama in conflict with Republican congressional leaders such as House Speaker John Boehner, who last week declared tax increases “off the table” and urged the bipartisan supercommittee to focus on scaling back entitlement programs such as Medicare. The panel has a Nov. 23 deadline to come up with a plan.

The positions represent a retreat from compromises that Obama and Boehner struck in unsuccessful negotiations in July to reduce long-term deficits and a sharpening of partisan differences over the budget. It sets the stage for a potential stalemate in the supercommittee’s deliberations.

Overhauling Tax Code

Obama coupled the call for tax increases with spending cuts that he said would reduce the long-term deficit by $3 trillion beyond the $1 trillion that was agreed to as part of a deal to raise the U.S. debt ceiling.

He included a proposal to overhaul the tax code. He said his plan would eliminate “special lower rates for the wealthy” which were “meant to be temporary.” He also would close loopholes in corporate tax law.

Republicans swiftly condemned the president’s plan.

“Veto threats, a massive tax hike, phantom savings, and punting on entitlement reform is not a recipe for economic or job growth -- or even meaningful deficit reduction,” Senate Minority Leader Mitch McConnell of Kentucky said in a statement.

“Pitting one group of Americans against another is not leadership,” Boehner of Ohio said in a statement. The president “has not made a serious contribution” to the deliberations of the supercommittee, he said.

‘Crushing Impact’

Former Massachusetts Governor Mitt Romney, a contender for the Republican Party nomination to face Obama next year, criticized the president’s plan as a threat to job creation.

“President Obama’s plan to raise taxes will have a crushing impact on economic growth,” Romney said in a statement. “This is yet another indication that President Obama has no clue how to bring our economy back.”

The administration and congressional Republicans are at odds over how to re-ignite the economy, drive down unemployment and grapple with the nation’s long-term deficit. Administration forecasters project the economy will grow at a sluggish 1.7 percent rate this year and the jobless rate will average 9.1 percent in 2011 and show little change in 2012, when the presidential election takes place.

To deal with the deficit, Obama won’t support any increase in the eligibility age for Medicare, as he did while trying to negotiate a broad deficit-reduction package with Boehner in July, according to administration officials, who briefed reporters before Obama spoke on condition of anonymity. The officials said Obama only accepted the measure as a concession to Republicans to assure speedy passage of an increase in federal borrowing authority to avert a U.S. debt default.

Medicare Cuts

Obama will seek $248 billion in Medicare cuts, including reductions in payments to health-care providers, and $72 billion in savings from the Medicaid state-federal health program for the poor, the officials said.

He’s also adopting billionaire investor Warren Buffett’s suggestion that the nation’s “mega-wealthy” pay more taxes, prompting one leading Republican to accuse the president of engaging in “class warfare.”

The provision, which the White House is calling the Buffett rule after the 81-year-old chairman and chief executive officer of Berkshire Hathaway Inc., would require people with incomes of $1 million or more to pay at least the same percentage in taxes as middle-income Americans, an administration official said.

“Class warfare will simply divide this country more,” Republican Representative Paul Ryan, chairman of the House Budget Committee, said on the “Fox News Sunday” program. “It will attack job creators, divide people, and it doesn’t grow the economy.”

More Than Cuts

Obama rejected that criticism.

“We can’t just cut our way out of this hole,” he said. “It’s only right that we ask everyone to pay their fair share.”

Treasury Secretary Timothy F. Geithner said there are multiple approaches to enacting the Buffett rule, which he called “a simple, basic principle” that should guide efforts to rewrite the tax code.

“If you make more than $1 million a year in the United States you should pay no less as a share of your income than an average middle-class family,” he said in a Bloomberg Television interview.

He said the administration would look for a chance to move quickly with Congress to revamp the individual and corporate tax system. The approach to corporate taxes is the same as Obama has talked about in the past: lower rates while closing loopholes to broaden the tax base.

Geithner said that would bring in more revenue while making the U.S. “a better place to invest, build things, create things.”

‘Billionaire-Friendly Congress’

During his bus tour last month through rural areas of Minnesota, Iowa and Illinois, Obama quoted from a New York Times opinion article in which Buffett wrote that the nation’s richest individuals have been “coddled long enough by a billionaire- friendly Congress.” Buffett argued for raising taxes for the “mega-rich” in the U.S.

Buffett has served as an informal adviser to the president since Obama’s 2008 election campaign. He plans to hold a Sept. 30 fundraiser in New York for Obama’s re-election bid.

While Obama hasn’t set a minimum tax for those with $1 million-plus in income, his prime target is the differential between the tax rates on capital gains and ordinary income. Today’s 20-percentage-point difference gives taxpayers an incentive to find ways to reclassify wage income as investment income.

Targeting Farm Subsidies

In addition to the cuts in Medicare and Medicaid, Obama is seeking $260 billion in savings from other so-called mandatory programs not subject to annual appropriations, the officials said. That includes $33 billion in cuts to farm subsidies and $42.5 billion in reductions to federal employee-benefit programs covering both civilian workers and military personnel.

Another $1.1 trillion would come in savings from winding down the wars in Afghanistan and Iraq, the officials said.

The jobs plan the president has offered is a $447 billion package of tax cuts and spending. He proposes to pay for it largely by capping itemized deductions and some exclusions for individuals earning more than $200,000 a year and married couples earning more than $250,000.

Carried Interest

He also would tax the carried interest, or profits-based compensation, of private equity managers, real estate investors and venture capitalists as ordinary income, instead of more lightly taxed capital gains, and limit the oil and gas industry’s ability to claim domestic manufacturing deductions for drilling.

Obama is incorporating all those tax proposals in his deficit plan, along with the expiration of the tax cuts passed under the administration of President George W. Bush for individuals making more than $200,000 and couples making more the $250,000.

The tax increases and spending cuts Obama will propose would come on top of the more than $1 trillion in reductions to discretionary spending that he and Congress agreed to when they raised the national debt limit in August, for a total of more than $4 trillion over 10 years.

--With assistance from James Rowley, Hans Nichols, Catherine Dodge and Margaret Talev in Washington. Editors: Joe Sobczyk, Mark McQuillan

To contact the reporter on this story: Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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