What Did You Think Would Happen?

Lori Montgomery and Ceci Connolly of the Washington Post reported yesterday in "Obama's First Budget Seeks To Trim Deficit," that the Obama administration is seeking to improve the budget process, and to close a budget deficit estimate at $1.2 trillion.

The improvement in the budget process would come through "honest" reporting and forecasting of revenues and expenditures. This is not a new goal. The party out of the White House decries the expenditures swept under the political rug, and the exaggerated projections of future revenues reached through rosy economic assumptions as every administration attempts to claim progress in battling out-of-control expenditures while doling out pork to allies. The Obama administration should receive good karma and tons of accolades if they reach this goal. Montgomery and Connolly report on the administration's view of the Bush administration's budgeting process.

For years, budget analysts complained that former president George W. Bush tried to make his deficits look smaller by excluding cost estimates for the war in Iraq and domestic disasters, minimizing the cost of payments to Medicare doctors and assuming that millions more families would pay the costly alternative minimum tax.

Closing the estimated $1.2 trillion deficit, in part a result of the new administration's stimulus bill is a daunting task. The authors state,

President Obama is putting the finishing touches on an ambitious first budget that seeks to cut the federal deficit in half over the next four years, primarily by raising taxes on businesses and the wealthy and by slashing spending on the wars in Iraq and Afghanistan, administration officials said.

Reducing spending on the wars in Iraq and Afghanistan, given that President Obama is sending 17,000 more troops to Afghanistan will come exclusively by cutting expenditures in Iraq. Given the timetable for withdrawal, and the reduced role of the U.S. military in Iraq, that would have happened anyway.

The administration also hopes to reduce expenditures on Medicare and Medicaid by modernizing record keeping and improving incentives doctors face, rewarding outcomes not procedures. The biggest target may be the Bush-era Medicare Advantage program.

by reducing spending on some health programs so the administration would have money to devote to initiatives to expand coverage. The biggest target is bonus payments to insurance companies that run managed-care programs under Medicare, known as Medicare Advantage.

The Bush-era program has attracted nearly a quarter of Medicare beneficiaries to private health insurance plans that cover a package of services such as doctor visits, prescription drugs and eyeglasses. But the government pays the plans 13 to 17 percent more than it pays for traditional fee-for-service coverage, according to the Medicare Payment Advisory Commission, which advises Congress on Medicare financing issues.

Eliminating this program will be unpopular with participants if they were attracted to the program rather than pushed into it.

Revenue will be raised by allowing Bush-era temporary tax cuts on the rich, those earning more than $250,000 annually, to expire.

Obama also seeks to increase tax collections, mainly by making good on his promise to eliminate some of the temporary tax cuts enacted in 2001 and 2003. While the budget would keep the breaks that benefit middle-income families, it would eliminate them for wealthy taxpayers, defined as families earning more than $250,000 a year. Those tax breaks would be permitted to expire on schedule in 2011. That means the top tax rate would rise from 35 percent to 39.6 percent, the tax on capital gains would jump to 20 percent from 15 percent for wealthy filers and the tax on estates worth more than $3.5 million would be maintained at the current rate of 45 percent.

Obama also proposes "a fairly aggressive effort on tax enforcement" that would target corporate loopholes, the official said. And Obama's budget seeks to tax the earnings of hedge fund managers as normal income rather than at the lower 15 percent capital gains rate.

Two hundred and fifty thousand is a very low threshold for rich. I doubt that taxpayers in New York, Boston, San Francisco, Seattle or Los Angeles would consider themselves rich with that income. Nor do I like the segregation of the rich into a socially undesirable group. If the administration would have talked of raising taxes on blacks or Jews, people would have properly been offended, why are we not? People respond to incentives. If you want less of something, you tax it. In this case, the something is investment and wealth creation.

The Dow responded to the proposal Monday by shedding another 250 points (3.4%). Sure, part of the fall might be connected to other concerns, but investors cannot be happy knowing that the firms they own and the dividends they are paid will be taxed at higher rates.