Obama’s Deficit Plan Cuts Medicare, Raises Taxes
Policy + Politics

Obama’s Deficit Plan Cuts Medicare, Raises Taxes

President Obama on Monday will stake out his election year position on deficit reduction with a 10-year, $3 trillion plan that relies on raising taxes on high-income earners, ending corporate loopholes and winding down the U.S. presence in Afghanistan and Iraq.

The centerpiece of new package, which comes on top of the $1 trillion in domestic discretionary spending cuts passed in August to end the debt ceiling crisis, raises $1.5 trillion in new revenue by ending the Bush era tax cuts for households earning over $250,000 a year and eliminating a wide range of corporate and high-end tax breaks.

The plan’s $1.5 trillion in spending cuts relies on reducing overseas military commitments by $1 trillion – savings already built into the Congressional Budget Office’s “alternative” baseline. The plan also includes $580 billion in new cuts to entitlement programs with two-thirds coming from Medicare and Medicaid.

However, the plan leaves Medicare’s eligibility age alone and makes no changes in Social Security benefits. “It’s an election year document that sets forth the president’s approach to addressing our fiscal situation,” said Jay Powell, a former Treasury Department official in the first Bush administration and now a visiting scholar at the Bi-Partisan Policy Center. “I hope the president’s proposal encourages the super committee to put together a larger package.”

The 12-member committee, made up equally of Democrats and Republicans, has until the end of November to come up with a minimum of $1.2 trillion in new spending to be approved by Congress and signed by the president. Failure to reach a deal by the end of the year will result in across-the-board cuts to domestic and military discretionary spending starting in 2013.

Senior administration officials described the president’s tax proposals as consistent with his prior calls for comprehensive tax reform. The proposal will lower rates and reduce the deficit by $1.5 trillion by cutting “wasteful loopholes and tax breaks,” they said.

The administration is also adopting what it calls the Buffett rule. “People making more than $1 million a year should not pay a smaller share of their income in taxes than middle class people pay,” a senior official said. “Given the fiscal situation we face . . . getting our economy moving and getting us back on a firm fiscal footing requires everyone bear their fair share.”

“Class warfare may make for really good politics, but
it makes for rotten economics,”

Republican leaders are already preparing their broadsides for attacking the plan. “Class warfare may make for really good politics, but it makes for rotten economics,” Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee, said on Fox News Sunday.

But the president’s liberal supporters, who were severely disappointed when the administration caved into Republican demands for sharp cuts in domestic spending, are already cheering its populist elements. “The report that the President is planning to ask millionaires and billionaires pay taxes at a higher rate than their secretaries pay is welcome news that will be wildly popular with voters,” said Roger Hickey, co-director of the Campaign for America’s Future, a coalition of progressive activist groups.

The coalition had bombarded the White House with tens of thousands of messages in recent days demanding no changes to Medicare’s eligibility age or Social Security benefits. The president’s proposal heeded those demands.

But the Obama administration proposal would put additional pressure on Medicare and Medicaid providers, who are already slated for nearly a half trillion dollars in payment reductions over the next decade to pay for health care reform. The new plan calls for carving an additional $248 billion out of Medicare’s projected spending and $72 billion out of Medicaid over the next decade.

A senior official said 90 percent of those cuts would come from “overpayments.” Already under pressure to cut costs, hospitals, physicians, drug and device companies, and durable equipment manufacturers would bear the brunt of those additional reductions.

The proposal does call for increasing premiums for some Medicare beneficiaries, which is a form of means-testing. The president (will) not do those unless the Republicans are willing to ask wealthy Americans and big corporations pay their fair share,” the senior administration official warned. “These are things we’re willing to do if they’re willing to get revenue from corporations and the wealthiest Americans.”

Tax lobbyists and their corporate clients, like the rest of the public, will learn the details of the president’s tax reform proposal after it is unveiled at a Rose Garden ceremony later this morning. Many of the loopholes highlighted Sunday by senior administration officials had already been targeted for elimination to pay for the president’s $487 billion jobs package, which is also paid for in the new package. They include special breaks for oil and gas producers; elimination of the “carried interest” tax break on hedge fund and private equity fund managers; and eliminating benefits for owners of corporate jets.

The overall package raises $800 billion over the next decade by returning high-income households to the tax rates that existed before 2001, and $700 billion from eliminating some tax deductions and closing loopholes. To lower rates without raising the deficit, the administration would have to find other breaks to eliminate.

Besides the cuts to Medicare and Medicaid, other entitlement program facing the chopping block in the president’s plan include farm subsidies and federal employee and military retirement programs, officials said. The administration also plans to lay out a roadmap for returning the postal service to solvency.