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November 14, 2012

Obama’s Opening Bid: His FY2013 Budget Request

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The President's proposed budget cuts add up to $4 trillion over 10 years

The White House released to the Washington Postwhat amounts to an opening bid for fiscal slope/grand bargain talks. It turns out that this is actually just what was in the President’s proposed 2013 budget. But since it does add up to $4 trillion over 10 years, and since everyone’s getting serious about negotiations, we can take a closer look at it.

The major component is tax increases:

Obama plans to open talks using his most recent budget proposal, which sought to raise taxes on corporations and the wealthy by $1.6 trillion over the next decade, White House press secretary Jay Carney said Tuesday. That’s double the sum that House Speaker John A. Boehner (R-Ohio) offered Obama during secret debt negotiations in 2011 [...]

“We know what a truly balanced approach to our fiscal challenges looks like,” (White House Press Secretary Jay) Carney said. “The president has put forward a very specific plan that will be what he brings to the table when he sits down with congressional leaders.”

Kevin Drum actually itemizes this. Basically, it includes letting the Bush-era tax rates above $250,000 expire AND a series of deduction limits, loophole closures, a reversion of the estate tax, and the Buffett rule.

Allow the Bush tax cuts on high earners to expire. $849 billion
Limit itemized deductions to 28 percent, close some loopholes and deductions on high earners, eliminate tax breaks for oil and gas companies, eliminate the carried interest loophole, plus a few other items. $584 billion
Create a special “Buffett Rule” tax rate for millionaires. $47 billion
Restore the estate tax to 2009 levels. $143 billion
Limit corporate income shifting to low-tax countries. $148 billion
Other miscellaneous tax increases and reductions. About -$200 billion
Total: $1.6 trillion

So that’s the tax side of the equation. It’s twice as much as what was offered at the outset in the 2011 grand bargain talks, and it’s in line with Bowles-Simpson in terms of using the expired Bush-era tax rates on the wealthy as a baseline. And the President insisted to progressive leaders at the White House yesterday that he would continue with the plan to let those top marginal tax rates expire. The idea of substituting tax rate increases with something that uses deduction limits to raise taxes on the rich isn’t catching on in the White House. Even Tim Geithner said no to that yesterday, along with Bob Rubin. Geithner basically said that the math wouldn’t add up without increasing those top rates.

But there was more in the Obama budget request, enough to add up to $4 trillion in total budget cuts:

Obama’s 2013 budget sought to reduce borrowing over the next 10 years by about $4 trillion, counting $1.1 trillion in agency cuts already in force. In addition to raising taxes, Obama proposed to slice $340 billion from health-care programs and to count about $1 trillion in savings from ending the wars in Iraq and Afghanistan.

Here’s that 2013 budget. The two important things here: 1) the budget counts the spending cap from the debt limit deal as part of deficit reduction, which it is; 2) it uses war savings, which amounts to an accounting maneuver, as deficit reduction in this context. Basically, CBO scores what you spend on a war in the current fiscal year as constant over a ten-year period, so you can authorize reductions and “save” the money.

Which means that the only new cuts would be the $340 billion from health care programs. It’s hard to find, but you can take a look at them here. It’s mostly cuts to providers, not cuts to benefits. The White House describes it as changes “to make these programs more effective and efficient and move our health system to one that rewards high-quality medicine.”

There are other cuts and consolidations in the 2013 budget, but what we have actually gets you to $4 trillion: $1.6 trillion in tax increases, $340 billion in health care program savings, $1 trillion in war funding savings, and $1.1 trillion in baked-in cuts from the debt limit deal. Even if those numbers don’t save quite as much as envisioned in the 2013 budget, you can count savings on debt service and you’re probably above $4 trillion.

The White House calls it $2.50 in spending cuts for every $1 in new revenue. But in terms of what would be newly passed into law, you’re talking about nearly $5 of new REVENUE for every $1 of spending cuts.

Obviously this is a stronger deal than what Obama was willing to contemplate last year. But it’s only an opening bid. The important other detail in this fight is that the public expects these negotiations to fail and will blame Republicans when they do. That makes it much easier for Democrats to go “over the cliff,” which gives them more leverage, at least on tax rates.

UPDATE: I would just add that, if Republicans immediately surrendered and put this into law, it would be bad news for the public. The payroll tax cut wouldn’t be extended (we don’t know how extended unemployment benefits factor into this). The small spending cuts and larger tax hikes would have an impact, though a mild one since they’re clustered around the rich. And the spending cap lowers discretionary public investment to the lowest percentage of the economy since the Eisenhower era, which is nothing to be proud of. Maintaining the spending cap actually looks like the worst part of this. This would absolutely create a drag on GDP of at least 1%, for no discernible reason, since we’re not in a debt crisis.

Photo: Pete Souza at

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