At 10:30 AM ET President Obama will be unveils his version of a deficit reduction plan. It calls for some $3 trillion in savings on top of the approximately $1 trillion called for under the debt ceiling deal enacted in August, with $450 billion going to pay for his jobs bill.
Here is a rough breakdown of the details we have so far of the plan:
Mandatory spending cuts: $580 billion.
- $248 billion will come out of Medicare.
- Another $72 billion will come from Medicaid and other health programs.
- Another $260 billion to come from cuts to farm subsidies and federal worker pension benefits, but not yet clear.
Tax Revenue: $1.5 trillion
- $800 billion will come from letting Bush-era tax cuts expire for high-income households.
- Another $400 billion from capping the value of itemized deductions and other exemptions for high-income households.
- $300 billion from closing tax loopholes.
- $480 billion from the Buffet tax - a 5.4% surtax on joint returns above $1 million and individual returns above $500,000. Possibly higher levies on super-rich (those making $10 million or more per year).
This adds up to more than $1.5 trillion, as there is still some degree of speculation in regards to the proposals.
War Savings: $1.1 trillion
- Winding down Iraq and Afghanistan over the next decade.
Interest Savings: $430 billion
- By lowering future deficits, reduce the interest cost.
Obama may also want to raise the taxes from income from investment, which is taxed at a lower rate than ordinary income such as wages. That means raising the tax on carried interest from the current 15% that is the main income of hedge fund managers and private equities . The Buffett Rule is meant to mean that those earning more than $1 million should not be allowed to pay a lesser percent of their income in federal taxes than Americans lower down the income scale.
He also has some of the same proposals he had during the budget deficit debate including ending subsidies for oil and gas industry and ending tax breaks for companies that own private jets.
Setting the Battleground for 2012 Election
These tax proposals will have essentially no chance of passing through Congress but it will set up the dividing line between the Republicans and Democrats when it comes to the 2012 presidential election.
All in all it does seem that Obama is a eschewing his more conciliatory self, not meeting the Republicans halfway but instead offering a very liberal proposal that he hopes will fire up his base and strike a clear contrast to Republican policies. In other words don't expect too much impact on the financial markets and instead the impact of this proposal will be felt mainly in the political realm. With Obama holding near record lows for his presidency doesn't have much to lose by offering such a red-meat proposal for his liberal base. Perhaps he is goading the Republicans into a response where they are favoring the super-rich at the expense of trying to create jobs. It's a bit of theater and we'll see if it will be successful for Obama as fall progresses.
Chief Market Analyst