At Issue: U.S. Budget Deficit
President Barack Obama said Monday he will veto any bill that contains cuts to Medicare that does not also raise taxes on the wealthiest Americans. REUTERS

President Barack Obama has thrown down the gauntlet regarding the deficit reduction process -- the only question is, does he have the support of the American people to enact his budget vision, or is substantive action unlikely prior to the 2012 election, due to divided government?

Obama proposed a $3 trillion deficit reduction plan Monday, and underscored in perhaps the most adamant language and tone of his presidency that he would veto any bill/proposal that would call for cuts to Medicare that does not also raise new revenue.

I will not support any plan that puts all the burden for closing our deficit on ordinary Americans, Obama said in a Rose Garden news conference, The Associated Press reported.

Can't Have Seniors, Middle Class Bear Everything

The administration's deficit plan calls for $1.5 trillion in new taxes, and Obama sees the issue as one of shared sacrifice, arguing that it unreasonable to ask senior citizens and middle-income Americans to absorb cuts to entitlement and related programs while not asking those who reaped the greatest gains from the U.S. economy and society -- those with adjusted gross incomes above $1 million -- to pay slightly more in taxes.

It's only right that we ask everyone to pay their fair share, Obama said.

Congressional Republicans immediately branded the White House's deficit reduction program as class warfare. Obama rejected that thesis, out-of-hand.

This is not class warfare, it's math, the president said.

Federal Tax Loophole: Investment Income Tax at Low Rate

The centerpiece of the White House's plan is a proposal to increase the effective tax rate on incomes over $1 million per year.

Liberal and populist groups generally favor Obama's proposal because of what they argue is a flaw in U.S. tax law. Although in theory upper income groups pay a higher percent of their income in federal tax, after subtracting for deductions, credits, and other breaks, upper-income adults -- and especially the uber-rich with adjusted gross incomes above $5 million per year -- often pay a lower percent of their income in federal income tax than middle-income and working class adults.

In other words, Obama is going after one of the biggest loopholes in the current tax law -- and one that costs the U.S. Government hundreds of billions of dollars -- the 20 percent differential that encourages tax filers to find ways to reclassify wage income as investment income.

That loophole in federal tax law is one reason that hedge fund managers, for example, among other institutional investors and accredited investors, who gross over $10 million or $25 million per year can, via reclassification, shift wage/salary income to investment income --- often resulting in a lower effective tax rate than middle-income and working-class filers.

Those who have done well, including me, should pay our fair share, Obama said Monday.

The White House plan also includes modest changes to Medicare and Medicaid. Last year, Congressional Republicans sought to replace the conventional Medicare system with a voucher program in which senior citizens would be given a set amount of money per year to purchase health care insurance from private insurers. The proposal's major flaw? The voucher amounts were not large enough to cover the cost of private sector insurance premiums.

Republicans Oppose Tax on Millionaires

Meanwhile, the Congressional Republican response to Obama's $3 trillion deficit reduction plan will not have anyone declaring that the Republican Hill leadership is more creative than Thomas Edison.

Class warfare, U.S. Rep. Paul Ryan, R-Wis.

Class warfare, GOP Operative Karl Rove's American Crossroads said.

Class warfare, House Speaker John Boehner, R-Ohio, said.

President Obama was not phased.

I reject the idea that asking a hedge fund manager to pay the same tax rate as a plumber or teacher is class warfare, Obama told The Washington Post. I think it's just the right thing to do.

Obama added that attempts to structure the debate along class lines won't work in this case. Most polls indicate that a majority of Americans favor increasing taxes on upper-income and uber-rich Americans; in some polls a super-majority of Americans favor the tax surcharge.

Either we ask the wealthiest Americans to pay their fair share in taxes, or we're going to have to ask seniors to pay more for Medicare, Obama said. Either we gut education and medical research, or we've got to reform the tax code so that the most profitable corporations have to give up tax loopholes that other companies don't get. We can't afford to do both. This is not class warfare. It's math.

Political/Public Policy Analysis: Finally, President Obama structured the debate on the budget deficit issue in a way that reflects an even-handed, objective reality.

Simultaneously, Obama presented Congressional Republicans with an undeniable budget fact: the nation cannot entitlement cut its way out of the budget deficit. By extension, if Republicans want to achieve deficit reduction without additional revenue, they'll have to essentially render both the Social Security and Medicare programs useless. As they say in the Bronx, Good luck with that one, GOP.

Further, one can sense that -- at least on the issue of increasing taxes on upper-income groups -- the Republicans have run out of momentum. More than $10 trillion in wealth has been added to upper-income groups' portfolios since 2001 -- a massive increase in wealth -- while median incomes have been essentially flat, with some job segments seeing real income declines in the past 10 years.

That said, the political calculus for the Obama deficit reduction plan is not good. Simply, the Republicans effectively control one-half of the U.S. Government: they are in the majority in the House and they have filibuster power in the Senate.

As a result, there's almost no chance the GOP will back even a modest tax increase proposal. Rather, the GOP will simply try to run out the clock -- take no substantive action on key issues through November 2012, hoping they can defeat Obama/win the presidency and increase their seats in Congress. In other words, for all intents and purposes, Washington is already in campaign mode.

Further, given that most House Republicans are in red districts in which conservative voters dominate, the House GOP has no electoral incentive to compromise. These House GOP members can do what's in the interest of their political base -- even if it hurts the nation -- and not pay a price at election time. The GOP could even fail to act on the super committee's debt reduction plan, with automatic cuts taking effect, and still not bear a great deal of electoral fallout.

There is one slight chance for Obama and the Democrats to muster some legislation on taxes in the year ahead: if Obama is able to go over the heads of Congress in an appeal to the American people to put pressure on Congressional Republicans and raise taxes on the wealthy, on shared sacrifice grounds. However, at this juncture, given Obama's modest standing in the polls, Obama and the Democrats are unlikely to cultivate enough public interest to compel the GOP to act.

In other words, due to divided government, and absent super committee initiatives, all major budget decisions will be delayed until after the 2012 election.