President Obama Outlines Long-Term Budget Priorities for 2009–19

The president accomplishes this primarily by raising taxes on higher-income households and individuals, while reducing spending on defense contingency operations and certain healthcare programs.

The 2001 and 2003 tax cuts would be grandfathered for households earning less than $250,000, but the president re-institutes the higher tax brackets of 36% and 39.6% for households with incomes above $250,000. Also, with respect to the personal tax code, the president proposes to make the "Making Work Pay" tax credit permanent and expand the earned income tax credit over the long term.

With respect to business taxes, the budget makes upward adjustments to the net operating loss carry-back provision, which was substantially scaled back in the fiscal-stimulus legislation, makes permanent the R&D tax credit, and extends incentives for clean power generation.

With respect to defense spending, the president adjusts the budget baseline to include the real full-year costs of emergency spending (i.e., to reflect current overall overseas contingency commitments), and then makes proposals for reducing this higher baseline for defense spending, primarily by accelerating the withdrawal of troops from Iraq.

The president proposes comprehensive long-term reforms to the healthcare system. The concept he is floating is a "healthcare reserve fund." The reserve is funded about 50% by new revenues, and 50% by savings in efficiency and accountability. Revenues are funded by limiting itemized deductions that reduce the marginal tax rate below the 28% threshold for households with over $250,000 in income. Cost savings come from reducing drug prices and containing Medicare overpayments, inter alia. However, the healthcare reform proposals leave open the question of broadening access to health insurance.

Finally, the budget proposes an additional $250 billion for stabilizing the financial system. This is in addition to the funds already provided under TARP, and recognizes that further large commitments of public capital, including further injections to the GSEs, are necessary to restore the normal functioning of the credit markets.

The main Achilles' heel of the president's budget in the short term is the assumption that the U.S. economy will suffer a decline of only 1.2% in 2009, and see a strong rebound of 3.2% in 2010. A more realistic forecast range would be a decline of 2.0–2.5% this year, with perhaps a rebound of 2.0–2.5% next year.

Indeed, IHS Global Insight expects the economy to contract 2.7% in calendar 2009 and then rebound a modest 2.0% in 2010. With further injections of public capital to the financial system along the lines of what the president is proposing, we would expect the deficit to approach $1.8 trillion in 2009, and likely be around $1.2 trillion in 2010.

With the substantial long-term tax increases that the president has in his budget on households and independent businesses with incomes above $250,000, it could be extremely difficult to muster the votes from moderate Republicans to support such a tax plan. Thus, while the plan is bold in terms of its proposed redistribution of the tax burden to higher income earners, it will be very tough uphill sledding to get the required votes in the Senate to pass this type of overhaul of the tax system.