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Obama’s $4 Trillion Budget Sets Up Tax Fight With Congress

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President Barack Obama sent Congress a $4 trillion budget that would raise taxes on corporations and the nation’s top earners, spend more on infrastructure and housing, and stabilize, but not eliminate, the annual budget deficit.

The spending blueprint challenges Republicans to make politically thorny choices between defending current tax rates for the wealthy and Obama’s proposals to boost spending for the middle class, the Pentagon and companies that build domestic infrastructure.

It also plays to the president’s Democratic base with proposals to increase spending for domestic programs such as education and child care and expanding Social Security benefits for same-sex couples.

In remarks this morning, Obama said he’d reject any budget from Congress that locks in the “mindless austerity” of existing budget caps and cuts funding for his priorities.

“We would be making a critical error if we avoided making these investments,” the president told government workers at the Department of Homeland Security on Monday.

More than a fiscal plan, the budget sets the terms Democrats want for the political debate heading into the 2016 elections. Addressing income inequality has become a mantra for Democrats from Obama to Hillary Clinton, the front-runner for the party’s presidential nomination, and some of the Republican contenders have taken up the issue as well.

Obama’s Goals

The proposed budget for the fiscal year starting Oct. 1, released this morning in Washington, backs up Obama’s recent talk about directing assistance to the middle class, administration officials said. Rather than dialing back his goals after Republicans expanded their House majority and took control of the Senate in November’s midterm elections, the president is pursuing a more aggressive strategy.

Congressional Republicans, who are under no obligation to follow Obama’s blueprint, were out with criticism as soon as the budget documents arrived at the Capitol.

Representative Tom Price and Senator Mike Enzi, the chairmen of the House and Senate budget committees, called Obama’s proposals a “wish list.”

‘No Solutions’

House Speaker John Boehner, an Ohio Republican, criticized Obama for not having a plan to bring the budget in balance.

“It contains no solutions to address the drivers of our debt, and no plan to fix our entire tax code to help foster growth and create jobs,” Boehner said in a statement.

Obama’s plan includes $2.1 trillion in new revenue over the next 10 years, including from a 19% minimum tax on U.S. companies’ foreign earnings.

It projects a 2016 deficit of $474 billion. The shortfall would represent 2.5% of gross domestic product, a level that many economists regard as sustainable, down from a projected 3.2% in fiscal 2015. It wouldn’t rise above 2.6% of GDP in any year for the next decade under the president’s budget, even as the absolute numbers rise.

In fiscal 2017, the nominal deficit would narrow to $463 billion, or 2.3% of GDP. It would grow in each of the following years, from $479 billion in fiscal 2018 to a high of $687 billion in fiscal 2025.

Those figures are substantially less that the record $1.4 trillion deficit in 2009, the year Obama took office and the U.S. began pulling out of the worst recession since the Great Depression. Tax Plans

On the tax front, Obama wants to raise the top rate on capital gains and dividends to 28% from 23.8% and impose levies on asset transfers at death, closing what the White House calls the “largest capital gains loophole” in the tax code.

The president’s plan pits drug and technology companies that keep earnings overseas out of reach of U.S. taxes against firms that build roads, bridges and mass transit systems. He wants to fund $478 billion in infrastructure work over six years in part by applying a 14% tax to profits that are parked outside the country.

The president’s corporate tax plan, which creates a narrow opening to talk about a business tax overhaul with Republicans, includes the 19% levy on future foreign earnings for U.S. companies. The administration is no longer insisting that overseas profits be taxed at the 35% top U.S. corporate rate.

Discretionary Spending

He’s also setting up a confrontation between Republican defense hawks and spending hawks by offering a $38 billion increase for national security programs over current budget caps and $37 billion more in discretionary spending for domestic programs. His proposal to relax those spending limits, known as sequestration, would put discretionary spending for fiscal 2016 at $1.091 trillion, which is $74 billion above the limits.

Those discretionary appropriations, both the total amount and the details of how to allocate the money among federal agencies, are what Obama and Congress must agree on to keep the government running past the start of the fiscal year on Oct. 1.

One area that figures to get attention from Congress this year is cybersecurity. In the wake of hacks against banks, Sony and the U.S. Postal Service, the White House and lawmakers in both parties have been searching for ways to deter attacks, respond to them when they happen, and, in some cases, retaliate.

Obama would spend $14 billion, spread across government agencies, to bolster cybersecurity.

Targeting Families

Several proposals are aimed at constituencies important to Democratic candidates — tripling the child tax credit for families with kids under the age of 5, and creating a $500 “second earner” tax credit for families in which both spouses work. He had more room to do that without adding to the deficit as job creation brings in more tax revenue and the economy expands.

On education, Obama is proposing to make community college free for students who keep their grades up and make progress toward graduation, a plan that’s estimated to cost $60 billion over 10 years.

His budget would also aim at the other end of the educational spectrum, putting an additional $1 billion into Head Start, setting aside $750 million for universal preschool and expanding access to child care for 1.1 million more children under the age of 4 by 2025, according to a fact sheet released by the White House.

Same-Sex Benefits

Obama is calling for a change to the Social Security Act to allow same-sex couples to get spousal benefits, even if they live for now in a state that doesn’t recognize the marriage. The cost: $14 billion over 10 years.

In an effort to expand access to retirement plans for about 1 million U.S. workers, Obama proposes requiring employers to offer plans, such as 401(k)s, to employees with at least three years and 500 hours annually of service. Companies wouldn’t be obligated to offer them matching contributions. The budget also sets aside $6.5 million at the Labor Department to help states start automatic individual retirement accounts or 401(k)-type programs. California and Illinois have passed bills to create such systems for people without a plan at work and other states are considering legislation.

Several agencies would get major boosts in discretionary spending. That’s the amount that Congress and the president appropriate each year, as opposed to mandatory spending for programs such as Medicare and Social Security for which money is generally spent based on statutory eligibility for benefits.

Agency Increases

The Department of Housing and Urban Development would receive $41 billion, a 17.8% increase from the $34.8 billion the agency has this fiscal year. Increases in the HUD budget would go to fund more neighborhood redevelopment projects, and expansions of job training for public housing residents and programs to house the homeless.

The White House would also inject $6.2 billion more into the State Department, taking its discretionary spending to $46.3 billion from $40.1 billion — an increase of 15.5%.

The administration projects economic growth for the current calendar year will average 3.1%, which is in line with private forecasts. It would fall to 3% in the following year, 2.7% the year after that and 2.5% in 2019 before evening out at 2.3%.

Unemployment would average 5.4% for the coming calendar year, according to the White House estimate, with that number bouncing between 4.9% and 5.2% over the next decade.

The budget also foreshadows a battle over Social Security this year. Last month House Republicans signaled they’ll try to overhaul the retirement program now that their party controls both chambers. The House changed a rule barring a routine transfer of funds to the Social Security Disability Trust Fund, which is expected to run short of money to pay full benefits by late 2016.

Obama’s budget includes this transfer and doesn’t include a proposal from his fiscal 2014 budget to reduce future cost-of- living increases in Social Security.

–With assistance from Heidi Przybyla, Laura Curtis, Clea Benson, Mackensie Kvalvik, Angela Greiling Keane and Erik Wasson in Washington.

— Check out After Obama Address, Battle Lines Are Drawn in Congress on ThinkAdvisor.