President Barack Obama laid out a plan yesterday to slash $4 trillion from the deficit between now and 2023.
Here's roughly how it'll get done.
Obama's pitch more or less follows the bipartisan deficit commission's outline drawn out last year, although it isn't quite as aggressive -- the commission wanted to ax $4 trillion in 10 years, Obama proposes 12. Triggers would be set up to automatically slash spending across the board if debt as a percentage of GDP is not on a declining path by 2014. The plan favors spending cuts over tax hikes, promising "three dollars of spending cuts and interest savings for every one dollar from tax reform that contributes to deficit reduction."
Now some details.
Obama proposes rolling back the Bush tax cuts in 2013 for those earning more than $250,000. Top marginal tax rates would revert to levels seen in the '90s, rising from a current 35% to 39.6%. Here's how this looks historically:
Source: Tax Policy Center.
Then there's tax code reform. "The President is calling for individual tax reform that closes loopholes and produces a system which is simpler, fairer and not rigged in favor of those who can afford lawyers and accountants to game it." Possibilities include nixing the mortgage interest deduction for higher earners and only allowing partial deductions of health insurance and retirement contributions for all.
One Obama official noted Wednesday morning that tax tweaks would boost revenue by $1 trillion over the next 12 years, but declined specifics -- including how much of the forecast is expected to come from the expiring Bush tax cuts versus the elimination of deductions. Still many unanswered questions.
The plan seeks to tackle Medicare's exploding costs by giving new powers to the Independent Payment Advisory Board. The board would hold Medicare cost growth at GDP plus 0.5%, rather than the GDP-plus-1% target set by ObamaCare last year.
It expects to do that primarily by "allowing [IPAB] to promote value-based benefit designs that promote proven service." In English this means no more blank checks. Medicare would cover services that are necessary and proven effective and efficient over more expensive alternatives. Full stop. Private coverage and out-of-pocket funds could still be used as patients wish, but taxpayers stop funding open-ended commitments.
Obama's proposal also has unwelcomed news for big drug companies like Pfizer
Obama touts Defense Secretary Robert Gates' efforts to find defense savings, which it says have "shown over the last two years that there is substantial waste and duplication in our security budget that we can and should eliminate."
But Gates' savings were largely reinvested back into other areas of the defense budget. Obama proposes to cut $400 billion from projected defense spending, which would be used for deficit reduction. This would be in addition to money saved from "ramping-down overseas contingency operations." Boeing
Nondefense discretionary spending
Obama's proposal runs with the budget agreement Congress made last Friday -- which it touts as "the largest one-year reduction in discretionary spending in our history" -- and follows the deficit commission's advice on spending levels for the next decade. Combine the two, and nondefense discretionary spending is cut $770 billion over the next 12 years. This is such a small part of the overall budget that it deserves minimal attention.
The proposal notes that Social Security isn't a driver of current deficit troubles. It does, however, support "bipartisan efforts to strengthen Social Security for the long haul, because its long-term challenges are better addressed sooner than later."
$360 billion would be cut or saved from other mandatory programs, which could include unemployment benefits, food stamps, farm subsidies, student loans, as well as stronger anti-fraud measures.
What do you think about Obama's budget proposal?
Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Pfizer is a Motley Fool Inside Value choice. The Fool owns shares of Raytheon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.