Wealthy Face Tax Increase

Budget Projects Rising Debt Despite Cuts in Spending; GOP Decries Deficits By JONATHAN WEISMAN WASHINGTON—President Barack Obama's $3.8 trillion budget for the coming fiscal year raises taxes on businesses and upper-income households by $2 trillion over 10 years and cuts spending on programs with considerable political support, but will still leave the nation with $8.5 trillion in added debt over the next decade. The budget plan for fiscal 2011 calls for nearly $1 trillion in tax increases on families with income above $250,000 over the next decade—largely by allowing tax cuts from the administration of George W. Bush to expire. But extensions of Bush tax cuts for the middle class, plus new tax cuts in Mr. Obama's jobs program, would cost the government $284 billion over the coming decade. Banks and multinational corporations would face new fees and levies. And oil companies would lose $36.5 billion in tax breaks over the next decade. The budget's political pain and the difficult choices it poses for fiscal 2011 and beyond underscore the fiscal hole the nation finds itself in after a decade of deficits and a deep recession. It will add fuel to the election-year debate over the size and scope of government that Americans want and their willingness to pay for it. "It tells you we're in a lot worse shape than advertised," said David Walker, a former U.S. comptroller and now president of the Peter G. Peterson Foundation, a think tank focused on budget reduction. Budget analysts say the plan, for the fiscal year that begins in October, shows the obstacles in the way of Mr. Obama's effort to close the budget gap without raising taxes on the vast majority of Americans. The Obama budget is subject to approval by Congress, and it's unlikely to pass without significant changes. Last year, proposals to limit tax deductions for upper-income households and force polluters to buy carbon-emission credits were to pay for major initiatives. Neither passed. One conflict looming with Congress this year concerns what to do about the 2001 and 2003 cuts to income taxes, capital gains and dividend taxes and estate taxes, which all expire Jan. 1, 2011. Mr. Obama would extend the cuts for middle- and lower-income Americans, but allow taxes to rise for wealthy families, although not all the way back to the levels under President Bill Clinton. The two top income-tax brackets would rise to 36% and 39.6%, from 33% and 35% respectively. For families earning at least $250,000, capital gains and dividend tax rates would rise to 20% from 15%. All told, upper-income families would face $969 billion in higher taxes between 2011 and 2020. The president dared Republicans to oppose the spending cuts he proposed. Many Republicans say the budget could be balanced with spending cuts alone. Both sides have declared the bulk of the budget—defense and entitlements such as Medicare—off limits for big cuts. "What I will not welcome—what I reject—is the same old grandstanding when the cameras are on, and the same irresponsible budget policies when the cameras are off," Mr. Obama said. "It's time to save what we can, spend what we must, and live within our means once again." Mr. Obama called for killing the National Aeronautics and Space Administration's manned mission to the moon, halting the additional production of C-17 military transport planes and Joint Strike Fighter components, and cutting the Army Corps of Engineers budget and agriculture programs. "The president's proposed NASA budget begins the death march for the future of U.S. human space flight," said Sen. Richard Shelby (R., Ala.). Sen. Saxby Chambliss (R., Ga.) welcomed the president's decision to "rein in government spending," but complained the proposed budget "unfairly targets farmers and ranchers to achieve savings and fund Washington-based programs." Even with tax increases and spending cuts, Mr. Obama's budget foresees a record deficit of $1.6 trillion this fiscal year, shrinking to $706 billion in red ink by 2014, only to begin rising again as retiring baby boomers drive up the costs of Medicare and Social Security. By 2020, the federal debt will have risen from $7.5 trillion—or 53% of gross domestic product—last year to $18.6 trillion, 77% of GDP. Kenneth Rogoff, a Harvard University economist who has studied other countries' experiences, says debt levels already forecast would push the U.S. toward a tipping point where interest rates could soar, the dollar could plunge and the economy could face a crisis. "We will hit a point where it comes on us very quickly, and you don't want to edge up to that point," Mr. Rogoff said. "Going beyond 80% you're taking a real chance." Mr. Obama reiterated his plan to freeze spending on nonmilitary programs, about 17% of the total budget. He pledged to name a bipartisan fiscal panel entrusted to recommend ways to bring the deficit down in the short term while addressing Social Security, Medicare, Medicaid and tax issues over the long run. But the White House was cautious, setting a goal of attaining by 2015 "primary balance" for the budget—equalizing revenues and spending, but excluding interest payments on the debt. The International Monetary Fund uses the primary-balance standard for the world's poorest countries trying to get their fiscal houses in order. Savings the president once anticipated from winding down the wars begun during the Bush administration are pushed back to 2012. Mr. Obama's troop increases in Afghanistan and withdrawal of forces from Iraq—known in the budget as "overseas contingency operations"—will cost $160 billion this year and next, $46 billion more than forecast last year. "You've got to think bigger," said Sen. Judd Gregg of New Hampshire, ranking Republican on the Senate Budget Committee. "I do think the American people are ready for much tougher decisions than the Congress is ready for." At 3%, the White House's estimate of economic growth from the fourth quarter of 2009 to 2010 is just slightly higher than last month's Blue Chip consensus forecast of 2.9%. Its growth estimate for 2011, at 4.3%, is rosier than the 3.2% forecast of private economists. But the White House's jobs forecast is as gloomy as anyone's. The White House Council of Economic Advisers foresees 10% unemployment lasting through 2010 and falling only to 9.2% in 2011 and 8.2% in 2012, creating pressure on Congress to extend jobless insurance. Under the Obama plan, budgets of the departments of Agriculture, Commerce, Justice, Health and Human Services, and Housing and Urban Development would be cut. Spending at Congress's discretion would decline, to $1.38 trillion from $1.4 trillion. But with rising costs of interest, Social Security, Medicare and Medicaid, total government spending would rise by $85 billion, to $3.76 trillion.