Analysis: Obama budget proposes tax reforms and spending cuts to reduce long-term deficit

The Obama administration’s 2013 budget advocates a balanced approach to reduce the nation’s long-term deficit by cutting government spending and reforming the tax code to recover revenues lost during the Bush administration.

The White House contends the President’s proposals would cut deficits by $4 trillion over the next 10 years, bringing down the deficit to 2.8% of GDP by the end of the decade. 

Read more: CBO report shows extending Bush tax cuts will raise deficit

At the center of President Barack Obama’s deficit reduction plan are the expirations of the 2001 and 2003 Bush tax cuts and tax reforms to close loopholes exploited by big corporations and millionaires to pay a lower tax rate than most middle-class Americans. If enacted, these tax policies could reduce the deficit by $1.6 trillion in 10 years. But given the Republican’s obstinate opposition against any measures to raise tax revenues during an election year, Obama faces an uphill battle to reform the tax code this year.

“The [Obama administration] believes in a balanced approach that cuts spending responsibly, but also asks the most well-off in society – many of whom through loopholes and other exemptions, pay less in taxes than most middle-class families – to contribute their fair share toward reducing the deficit,” according to the OMB analysis. “We cannot address the a deficit a decade in the making through spending cuts alone – that is, unless we, as a country, agree to cut every program in the entire budget by more than a quarter, including defense spending, Social Security payments, Medicare benefits, and veterans’ benefits, along with everything else.”

In terms of spending cuts, the 2013 budget incorporates the $1 trillion discretionary spending caps mandated by the Budget Control Act of 2011. The law requires Congress to pass an additional $1.2 trillion in cuts by the end of the year. Failure to do so will trigger the budget “sequester” or automatic across-the-board cuts, gutting both defense and non-defense discretionary spending. The administration has warned that further cuts to the discretionary budget would “lead to an erosion of services that Americans would not want and undermine our national security in a way that we cannot allow…It would not be possible to go further and still meet the needs of the [nation].”

Read more: Discretionary spending will face another round of cuts if the Super Committee’s plan fails

In addition to the Budget Control Act reductions, the budget calls for health care (i.e. Medicare) and other mandatory (i.e. agriculture and unemployment insurance) spending cuts as well as spending caps on Overseas Contingency Operations (OCO). Combined, these savings will reduce the deficit by another $1.2 trillion.

Notably, the budget does not contain cuts to Social Security or Medicaid – two programs frequently targeted for cuts by Republicans. Unlike the proposed Medicare savings, cuts to Social Security would likely mean less money for seniors, many of whom are relying more on their Social Security checks during this time because much of their wealth and retirement savings were wiped out during Great Recession of 2007-2009.

“The bottom 20% of seniors in this country – millions of people – live on incomes of less than $12,080 a year. In fact, the average income for seniors in the bottom 20% is about $7,500,” said Sen. Bernie Sanders (I-Vt.).

So not only would deep cuts to Social Security benefits in 2012 and 2013 push many older Americans to the brink of poverty, they would also hurt the fragile economic recovery by reducing consumer demand. If seniors are forced to tighten their belts, they’ll spend even less money on food, medicine, clothes, transportation, and other expenses. Industries and local businesses that serve the older population would suffer and kill jobs, especially in states with a high percentage of retirees – including Florida (17.3%), West Virginia (16%), Maine (15.9%), Pennsylvania (15.4%), and Montana (14.8%).

Read more:  Older Americans hit hard by the Great Recession   

Cutting too much Medicaid funding would hurt low-income families, particularly those who have been out of work as a result of the Great Recession and the slow economic recovery, and add more health care costs in the public and private sectors. Denied or delayed treatments for illnesses end up costing more in the long-run. For instance, a bacterial infection that could have been easily treated with an antibiotic for under $100 could end up costing $2,000 because the patient was denied treatment and the infection worsened, requiring an ER visit and hospitalization. The health care provider would have to recoup the $2,000 somehow, whether it’s by seeking higher reimbursements from the government or by hiking up medical fees for everyone else.

While there is a need to control costs and ensure the sustainability of Social Security, Medicaid, and Medicare programs, Congress and the administration are at odds over how cut entitlement spending without hurting the truly disadvantaged and jeopardizing the economic recovery. However, an honest, in-depth, and thoughtful discussion on entitlement reforms may be possible on an election year when all 435 House members, 33 Senators, and the President are running for re-election and both political parties are vying to control Congress.

Key tax reforms to help reduce the deficit by $1.6 trillion over 10 years

  • Allow the 2001 and 2003 Bush tax cuts to expire. (The Bush tax cuts have added $1.8 trillion to the deficit by 2010.) The expiration would impact individuals reporting more than $200,000 in yearly income or married couples making more than $250,000 annually. However, people earning below $200,000 (or $250,000 for families) will continue to enjoy the tax cuts under the President’s plan. The expiration would reduce the deficit by $968 billion over 10 years.
  • Cap tax deductions for high-income earners. The current deduction rules favor the wealthy by allowing them to pay a lower tax rate than the average middle-class family. The cap would require individuals making more than $200,000 and families making more than $250,000 a year to pay at least 28% in taxes. This cap would reduce the deficit by $585 billion over 10 years.
  • Close the “carried interests” tax loophole. This loophole allows private equity partners and hedge fund managers to pay only 15% in taxes even if they earn millions each year. Closing this loophole would reduce the deficit by $13 billion over 10 years.
  • Eliminate special tax subsidies for oil and gas industries. Many of the big oil and gas companies have reported record profits during the past decade, yet they still receive taxpayer handouts worth billions each year. Eliminating the subsidies would reduce the deficit by $41 billion over 10 years.

Key spending cuts to reduce the deficit by $1.2 trillion over 10 years

  • Cap the Overseas Contingency Operations (OCO) funding to $450 billion between 2013 – 2021. OCO funding was used to pay for the wars in Iraq and Afghanistan and other “emergency” foreign spending. OCO budget was exempted from cuts required by the Budget Control Act. Capping OCO funding would prevent current and future administrations from spending unlimited money on “emergencies” without Congressional approval. In other words, OCO could not be used as a “slush fund” for unauthorized overseas spending. The cap would reduce the deficit by $741 billion between 2012-2021.
  • Reduce Medicare payments to health care providers. This would reduce the deficit by $111 billion over 10 years.

– Cut Medicare’s reimbursements to hospitals and other providers for bad debts incurred by seniors who didn’t pay their deductibles or copays. The reimbursement rate would drop from 70% to 25% for a 3-year period starting in 2013, saving $36 billion over 10 years.

– Cut Medicare payments to teaching hospitals for additional patient care costs. The Indirect Medical Education funds, which subsidize the training of medical residents, would be cut by 10% starting in 2014, saving $10 billion over 10 years.

– Lower payments to rural health care providers, saving $2 billion over $10 years.

– Recalibrate and reduce Medicare payments to acute care nursing facilities and long-term care hospitals. The reimbursements would be changed to reward better outcomes for the patients’ health, saving $63 billion over 10 years.

  • Reduce agriculture subsidies, including eliminating direct payments to farmers and lowering crop insurance subsidies, reducing the deficit by $30 billion over 10 years. Ending direct payment would save $23 billion over 10 years, and lowering crop insurance subsidies would save $7.4 billion over 10 years.

Cuts mandated by the Budget Control Act to reduce the deficit by $1 trillion over 10 years

  • Reduce defense discretionary spending by $487 billion between 2012-2021. If the Overseas Contingency Operations caps are approved, then the overall defense spending would be reduced by 5% over the next decade. In response to the savings, the Department of Defense would revamp the military to focus on post-Iraq and Afghanistan priorities, including increasing U.S. military presence in Asia-Pacific and the Middle East; emphasizing special operations training; modernizing technologies for intelligence, surveillance, reconnaissance, counter-terrorism, and counter-WMD purposes; and providing primary and mental health care to wounded veterans and support for military families.
  • Cut $520 billion from non-defense discretionary spending. The budget proposes a series of program eliminations or consolidations on top of efficiencies and reform measures to meet BCA cuts. These include restraining pay increases (to well below inflation) and scaling back on retirement benefits for federal employees, saving at least $55 billion over 10 years. These cuts would impact programs dealing with agriculture, children’s health, education, job training, science research and development, forestry, environmental, rural development, low-income housing, crime prevention, and clean energy programs.


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4 Comments on “Analysis: Obama budget proposes tax reforms and spending cuts to reduce long-term deficit

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