Federal Budget

Federal Budget

President Obama’s Budget Proposal

The President’s budget proposal has a mix of positive and negative elements. On the positive side, Obama proposes raising taxes on higher income households. (Currently, federal revenues are at historic lows.) He would implement the “Buffet Rule” requiring millionaires to pay taxes of at least 30% of their incomes and limit tax deductions for high-income tax payers. Income received by hedge fund managers (“carried interest”) would be taxed as earnings, not at the lower tax rate applied to capital gains.

Infrastructure spending would increase by $128 billion over the decade, creating jobs as well as improving many of our decaying physical structures.

Obama proposes substantial savings in Medicare primarily from cuts in fees paid to providers. He also would require higher-income beneficiaries to pay more for coverage of doctor visits and prescription drugs.

The President’s budget replaces sequestration – indiscriminate, across-the-board spending cuts – with a more balanced and less damaging mix of revenue increases and spending cuts.

The budget proposal furthers the President’s goal, first announced in his 2013 State of the Union Address to Congress, of providing preschool to all 4-year-olds in poor and moderate income households below 200% of poverty. This expansion is paid for by an increase in taxes on tobacco.

But the budget proposal also includes features that would harm vulnerable households.

The President proposes a change in the calculation of the annual cost of living adjustment (COLA). The net effect of the new method, called the chained Consumer Price Index (chained CPI), would be to reduce the annual cost-of-living increase in Social Security benefits. It would also dampen the annual increases in tax-bracket cutoffs making it more likely that a tax payer’s pay increase would boost him or her into a higher tax bracket. The proposal is especially problematic for seniors since the current cost of living adjustment, based on a market basket of goods purchased by a typical urban consumer, already fails to account for seniors’ greater spending on medical care. Since the cost of health care rises more rapidly than overall inflation, the existing COLA already understates the cost increases faced by seniors.  An even smaller inflation adjustment means seniors would fall further behind the true cost increases they face.  

The President also proposes further cuts to both military and non-military “discretionary” spending. Non-military discretionary spending pays for core government functions and services, everything from education to public health, park maintenance to the court system. This area of the budget has already been cut repeatedly in recent years and should not be subjected to more reductions.

The President’s budget does little to stimulate the economy next year although, by modifying the sequester, the deficit does not shrink as much as is currently planned. This is a good thing but it is inadequate. The country’s immediate need is stimulus spending to spur job creation and boost tax revenue. (See The Jobless Trap by Nobel prize-winning economist Paul Krugman.) In the long term the deficit must be addressed but that cannot be our priority at this time. 

In summary, this budget proposal has a mix of positive and negative elements. On the positive side, the budget brings in additional revenue by raising taxes on higher income individuals, moves toward providing preschool to all poor and moderate income four-year-olds, and replaces the indiscriminate sequester cuts with a more careful mix of spending cuts and revenue increases. But the new inflation measure, the chained-CPI, and further cuts to non-military discretionary programs would harm many people who are already struggling to get by. The proposal also provides far too little immediate stimulus to spur job creation and strengthen the weak economy.

  • The White House's description of the budget proposal.

Contact Info

Edith Rasell, Ph.D.
Minister for Economic Justice
700 Prospect Ave.
Cleveland, OH 44115