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Obama Debt Reduction Plan a Sharp Pullback from Grand Bargain Territory

The President’s plan to “go big” on the Super Committee is out, and it’s an opening bid that is far less pre-compromised than we’ve come to expect. Of the more than $3 trillion in deficit solutions (UPDATE: $3.6 trillion per WSJ, but the numbers don’t add up), $2.6 trillion consist of tax increases and savings from winding down the wars in Iraq and Afghanistan. That differs sharply, not only from the “grand bargain” Obama was said to be negotiating during the debt limit deal, but from his April budget speech, which was tilted more on the side of spending cuts.

That was a $4 trillion deal, and it’s worth adding the $900 billion in spending cuts from the first half of the debt limit deal to this to make it more of an apples to apples comparison. But even so, you would get $1.5 trillion in tax increases, $1.9 $1.5 trillion in spending cuts, and $1.1 trillion in war savings. And this from the New York Times coverage (emphasis mine) is the key point:

Mr. Obama will call for $1.5 trillion in tax increases, primarily on the wealthy, through a combination of closing loopholes and limiting the amount that high earners can deduct. The proposal also includes $580 billion in adjustments to health and entitlement programs, including $248 billion to Medicare and $72 billion to Medicaid. Administration officials said that the Medicare cuts would not come from an increase in the Medicare eligibility age.

Senior administration officials who briefed reporters on some of the details of Mr. Obama’s proposal said that the plan also counts a savings of $1.1 trillion from the ending of the American combat mission in Iraq and the withdrawal of American troops from Afghanistan.

In laying out his proposal, aides said, Mr. Obama will expressly promise to veto any legislation that seeks to cut the deficit through spending cuts alone and does not include revenue increases in the form of tax increases on the wealthy.

This effectively disbands the Super Committee, as far as I can see. The Republican members are not going to vote for a tax increase. And even if they did on the committee, it wouldn’t get through the House; John Boehner already took tax increases of any kind off the table in his address last week. If the Super Committee fails, we’re going to see the trigger pulled now. But Obama’s proposals draw the distinction very cleverly, because it will be the Republican turn against taxes on the rich that will lead us to that point.

It’s hardly worth going into the details of the Obama deficit deal, since with one word – “veto” – he ensured that no deficit deal will pass. But for what it’s worth:

Under Mr. Obama’s proposal, $800 billion of the $1.5 trillion in tax increases would come from allowing the Bush-era tax cuts to expire. The other $700 billion, aides said, would come from a combination of closing loopholes and limiting deductions among individuals making more than $200,000 a year and families making more than $250,000.

So this is a net tax cut of about $2.5 trillion from current law. Allowing the entire Bush tax cuts to expire would nets you around $4 trillion, but this only expires the tax cuts over $250,000 of income to get $800 billion. So the President is still adhering to the principle of no tax increases for anyone making under $250,000. However, the tax rates on the first $250,000 of income also hit the rich, under our marginal tax rate system. I don’t think Republicans would see this as a tax cut, but that’s actually what it does in practice. As the GOP sees it, it raises taxes on those job creators, the solons of the nation, and that must not happen.

The limit on itemized deductions is also part of the “tax trigger” on the American Jobs Act. The “Buffett rule” of a millionaire’s minimum tax, meant to replace the AMT and therefore not raise revenue, will also be part of the speech, but as a guiding principle.

Most importantly, this deficit plan does not include raising the Medicare eligibility age, a terrible idea that could have been adopted by future Congresses on the grounds that even a Democratic President proposed it. Roger Hickey of the Campaign for America’s Future did a victory lap on that one.

“If the news reports are accurate, President now has a plan he can take to the American people to re-invigorate our country and get America back to work. If the plan is what was described in the Wall Street Journal’s report Sunday evening, it includes raising the tax rates on millionaires and billionaires and it protects vulnerable and sick Americans from draconian cuts to Medicare, Medicaid and Social Security. This plan will be popular with the voters, although Washington’s corporate lobbyists might not like it.

“For months, organizations representing working people and retirees have been urging the President to listen to the American majority, who want jobs, not cuts to vital programs.

“The President has listened to the people. He is pushing for jobs and growth now – the number one priority of Americans. His deficit reduction plan will spur economic growth because it puts Americans back to work, and it will turn the unemployed into taxpayers.

The President’s speech on his deficit reduction plan is scheduled for 10:30 am ET.

UPDATE: According to Sam Stein, some of the Medicare cuts are beneficiary cuts, but they wouldn’t kick in until 2017. And, they couldn’t be passed by the Super Committee without the tax hikes on the wealthy, or they would draw a veto.

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David Dayen

David Dayen