Budget plan would leave deepest hole since 1945

WASHINGTON — President Obama on Thursday delivered to Congress a $3.6 trillion spending plan that would finance vast new investments in health care, energy independence and education by raising taxes on the oil-and-gas industry, hedge-fund managers, multinational corporations and more than 2 million of the nation's top earners.

The blueprint, meanwhile, would overhaul federal programs to strengthen assistance for millions of people who have borne the consequences of what Obama called "an era of profound irresponsibility," helping them pay for college, train for better jobs and save for retirement while taxing less of their earnings.

The agenda for the fiscal year that begins in October would not come cheap. This year's budget deficit, swollen by spending to combat a severe recession, would hit a record $1.75 trillion, or 12.3 percent of the overall economy, the highest since 1945. While Obama inherited the bulk of that gap, his budget would allow for a fresh round of spending to prop up troubled financial institutions that could hit $750 billion.

Next year's deficit would approach $1.2 trillion. But Obama proposes to cut that figure roughly in half by the end of 2012, in large part by levying nearly $1 trillion in new taxes on the highest earners, defined as families with gross income of more than $250,000 a year.

In unveiling the outline of his spending priorities, Obama acknowledged his proposal would "add to our deficits in the short term to provide immediate relief to families and get our economy moving." But he argued that the economic crisis should not be used as an excuse to delay costly investments intended to modernize the economy, enhance the work force and, ultimately, reduce government spending.

"What I won't do is sacrifice investments that will make America stronger, more competitive and more prosperous in the 21st century, investments that have been neglected for too long," Obama said. Citing the need to "break free" from foreign oil, reduce "crushing health-care costs" and improve public education, Obama said: "These investments must be America's priorities, and that's what they will be when I sign this budget into law."

Fierce battles ahead

With its immense scope and bold prescriptions, Obama's agenda seeks to give the government an active role in narrowing the growing gap between rich and poor. It is likely to spark fierce political battles on an array of fronts, from social spending to energy policy to taxes.

Alice Rivlin, a Brookings Institution economist who served as President Clinton's budget director, called the plan "gutsy and quite good."

"It has a strong flavor of the Obama philosophy, which is tilting the playing field away from upper income and toward the rest of America," she said.

Republicans quickly attacked the document as a recipe for economic disaster, saying it would raise taxes on businesses and consumers in the middle of a recession to bankroll a massive government expansion.

"The era of big government is back, and Democrats are asking you to pay for it," said House Minority Leader John Boehner, R-Ohio. "The administration's plan, I think, is a job killer, plain and simple."

White House budget director Peter Orszag rejected that analysis, saying none of the tax increases would take effect until 2011. But some economists worry that, even in 2011, the economy may be too fragile to absorb a tax increase. Meanwhile, some Democrats joined Republicans in complaining that the budget plan does not go far enough to narrow the yawning budget gap. While Obama predicted the deficit would fall to $533 billion by the end of 2012, it would begin to rise again quickly and the national debt would remain elevated throughout the next decade.

Obama is expected to send a complete budget plan to Congress in April, and Democratic leaders said they hope to approve it in the spring. But House Majority Leader Steny Hoyer, D-Md., predicted that finding the votes will be "tough."

In what the president called a "historic commitment to comprehensive health-care reform," the budget proposes to create a $634 billion reserve fund that lawmakers could use to finance a major expansion of health coverage for the uninsured. The fund would include savings from proposed efficiencies in Medicare and Medicaid and $318 billion in new taxes on families in the highest income brackets, who would see new limits on the value of the tax breaks they receive from itemized deductions.

Flurry of taxes on wealthy

That proposal is a fraction of the new taxes Obama proposes to heap on the highest earners. Individuals who earn more than $200,000 a year and families that make more than $250,000 also would lose tax cuts enacted during the Bush administration, meaning their top income-tax rate would rise from 35 percent to 39.6 percent, their investment income would be taxed at 20 percent rather than 15 percent and their deductions for mortgage interest, state and local taxes and charitable contributions would be reduced.

If Obama's tax plan is approved, a family making $500,000 a year would see its annual tax bill soar from about $120,000 to nearly $132,000, a 10 percent increase, said Clint Stretch, managing principal of tax policy at Deloitte Tax.

Hedge-fund managers would take an even bigger hit. Much of their multimillion-dollar earnings would be taxed as regular income rather than capital gains, causing their tax rate to rise from 15 percent to as much as 39.6 percent. Oil-and-gas companies would be asked to pay an extra $31 billion over 10 years through an excise tax on offshore production in the Gulf of Mexico and new fees for drilling on federal land. And corporations that operate overseas could expect to pay $210 billion more over 10 years as a result of new, unspecified limits on their ability to defer taxation on foreign earnings.