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Obama Deficit Plan: Where Does the Money Come From?

Two months after presenting a 2012 budget that would cut the federal deficit by $1 trillion over the next decade, President Obama upped the ante today, stating that he now wants to move forward with plans that will reduce the federal deficit by $4 trillion within the next 12 years.

The Obama Plan 2.0
The President's plan comes one week after Paul Ryan presented a Republican budget proposal that seeks nearly $6 trillion in cuts solely through reduced spending. The Obama plan takes a far different tack, as it aims to get about 75 percent of its cuts from reduced spending, and yes, 25 percent from "higher revenue" (Washington speak for taxes).

Much of the President's proposal closely echoes what his own bipartisan deficit commission laid out last December. Here's how the President seeks to find $4 trillion in savings:

TAXES: Raise $1 trillion more in revenue over the 12 years via the following:

  • Raise rates on the wealthy. As expected, the President reiterated his intention to raise taxes on households with income above $250,000 and emphatically stated that he would not allow the Bush tax cuts to be extended past 2012 for the top 2 percent of income earners. Obama has long campaigned for the wealthy to pay a bit more in taxes, but he made the case rather clumsily today, noting that neither he nor Warren Buffett are asking for tax breaks. Good to know. But um, last I checked, both of you raked in far more than $250,000 a year.
  • Cut itemized deductions and seek overall tax reform. The White House wants a "simpler, fairer" tax system that is "not rigged in favor of those who can afford lawyers and accountants to game it." That means fewer write-offs, with Obama specifically calling for deductions for mortgage interest and charitable contributions to be scaled back. But the deficit commission went further, also recommending tossing out the deductibility of state income tax and property tax. Keep in mind, though, that the loss of itemized deductions would also come with the addition of higher standard deduction and credits.
REDUCE SPENDING: $2 trillion in savings
  • Trim more from defense. The President seeks to find another $400 billion in reduced defense spending by 2023. This is on top of the $178 billion Defense Secretary Gates has already proposed trimming over 10 years through belt-tightening, a sum both the earlier Obama budget proposal and the Republican budget proposal had accepted without calling for further cuts.
  • Keep cutting back on other spending. The President is on board with his fiscal commission's plan to find big savings by scaling back non-security-related discretionary spending. The goal is to save $770 billion by 2023. Among the fiscal commission's recommendations are reducing the federal work force by 10 percent, freezing non-defense salaries for three years, and cutting out 250,000 federal contractor jobs.
  • Further reform Medicare and Medicaid. Obama made a point to remind everyone that the health care reform bill that became law last year is actually expected to reduce health care costs by $1 trillion. But on top of that the President now wants to find another $480 billion in cost savings by 2023, and another $1 trillion in the decade after. While the fiscal commission and the Ryan budget plan aimed to limit the growth in Medicare costs to GDP plus 1 percentage point, the President laid out a more ambitious plan to keep it to GDP plus one-half percentage point.

Obama also rejected Paul Ryan's GOP budget proposal that seeks to control health costs simply by refusing to pay anything above set limits, stating there is "nothing courageous" about generating $1 trillion in spending cuts on the backs of the elderly and the poor. That's certainly in line with a new Gallup poll that shows Americans pretty much hate Ryan's Medicare overhaul.

Instead, Obama is looking to find ways to actually reduce health care costs, such as by pushing more of Medicare drug benefits into generic drugs, and refocusing the health care system from an emphasis on pay-for-procedure to payments based on overall care and results. That's no easy feat, of course, but the President emphasized that he would not eviscerate the Medicare and Medicaid programs.

  • Make changes to Social Security. The President acknowledged that the plan needs shoring up, but noted that it is not a driver of current deficit issues, so he didn't make it a central focus of today's speech. But he did signal that he is behind the broad outlines of his fiscal commission's recommendations. That includes slowly raising the full retirement age to 68 by 2050 and 69 for today's toddlers, raising the early retirement age to 63 by 2050 and 64 by 2075, and increasing the income that is subject to the FICA payroll tax. Currently only the first $106,800 of income is subject to the tax. The wealthy would also see their future benefits reduced slightly under the commission's proposal.


The idea here is that as federal spending goes down, the need to borrow as much declines, too.

Next Steps
President Obama said he has tasked Vice President Joe Biden with the cat-herding job of convening a bipartisan Congressional commission in May -- yes, yet another commission -- to wrangle through all of these proposals and get him a final agreement for a plan by the end of June. Something tells me that deadline could be very tough to achieve.

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