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Last updated: April 10, 2013 6:55 pm
Barack Obama laid out a budget that targets wealthy Americans for more tax increases but included cuts loathed by liberal Democrats to the Social Security pension programme, as the president seeks to draw Republicans into a fiscal compromise.
Mr Obama’s plan – worth $3.8tn in spending for the 2014 fiscal year – sets the stage for the next round of high-stakes negotiations in Congress over the need to raise America’s borrowing limit by July to avoid a default on US debt.
“Our economy is poised for progress as long as Washington doesn’t get in the way,” Mr Obama said in a statement from the Rose Garden of the White House on Wednesday.
“I’ve already met Republicans more than halfway so in the coming days and weeks I hope that Republicans will come forward and demonstrate that they are really as serious about the deficits and debt as they claim to be,” he added.
Mr Obama’s budget includes a mix of old proposals that were never adopted, as well as new measures, including some that were offered in previous fiscal negotiations. John Boehner, the Republican House speaker, said the president deserved “some credit” for what he called “incremental” cuts to big spending programmes, but added: “I would hope that he would not hold hostage these modest reforms for his demand for bigger tax hikes.”
Unlike the House Republican budget, which achieves a surplus in ten years, Mr Obama’s plan slows the growth of US deficits to $744bn in 2014, or 4.4 per cent of gross domestic product, and $439bn, or 1.7 per cent of the economy, in 2023.
Mr Obama raises revenue primarily by limiting tax breaks for wealthy families earning more than $250,000 a year, capping their deductions at 28 per cent. The White House proposal also institutes a minimum tax on Americans earning more than $1m, known as the Buffett rule, and these two measures would raise $583bn over a decade.
However, the president is also proposing higher taxes on the rich in other areas, such as taxing hedge fund and private equity profits, known as “carried interest” as ordinary income rather than the lower capital gains rate, to raise $16bn; setting a $3m cap on retirement accounts with special tax benefits, to raise $9bn; lifting estate taxes, to generate $79bn, and a financial crisis fee for large banks worth $59bn in new revenue. Mr Obama reiterated that he is committed to corporate tax reform to lower the rate from its current level of 35 per cent – and pay for it by cutting business tax breaks on a revenue neutral basis.
But he specified that certain corporate tax preferences – for oil and gas groups, international profits and corporate jets – should be cut regardless of whether sweeping reform takes place. Mr Obama also embraced a plan developed by some House Republicans to impose “mark-to-market” accounting on derivatives contracts for tax purposes, raising $19bn over a decade. Meanwhile, Mr Obama is asking for research and development tax credits and tax incentives for renewable energy to be made permanent. A new high-profile tax feature is a $78bn hike in tobacco taxes to fund universal pre-school education programmes, lifting the federal tax on a pack of cigarettes from $1.01 to $1.95.
The most contentious element of Mr Obama’s budget within his own party was the adoption of “chained CPI”, a less generous measure of inflation that would result in lower Social Security pension benefits and would save $230bn over a decade. Mr Obama has said he would only consider this if it protected the most vulnerable seniors. Mr Obama also proposed broader cuts to Medicare, the government health plan for the elderly, than he has in the past, including higher premiums for beneficiaries as well as reductions to medical providers. Mr Obama is also pushing cuts to farm subsidies and is proposing a major reform to food aid, allowing NGOs to source food locally, rather than just from the US, to make it more “cost effective and improve its impact”.
Mr Obama is also seeking to spend new money in certain areas. Among his proposals are $40bn in “fix it first” projects to fund highway, bridges, transit systems and airport repairs, as well as the establishment of a National Infrastructure Bank and a new version of Build America Bonds to help finance local projects. And Mr Obama is asking Congress for $1bn to set up 15 “manufacturing innovation institutes” as specialised hubs across the country.
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