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26 February 2009

Obama Unveils Budget Plan

President Obama's new budget proposal includes health care reform, tax increases for the richest Americans and new spending. Despite this, Obama plans to slash the budget deficit in half by the end of his first term.

The budget deficit for 2009 is expected to reach $1.75 trillion or 12.3% of GDP. That is a record in dollar terms and the highest percentage against GDP since World War II.

President Obama has called on Americans to sacrifice for the good of the country. He is confident we will get through this, but we will have to re-prioritize our spending.

The White House expects to spend $3.6 trillion dollars and GDP to fall to 1.2% this year. Growth in GDP is expected to grow 3.2%, 4% and 4.6% over the next three years.

Unemployment will rise to 8.1% this year, but then is expected to drop to 7.9% next year and around 5% by 2014.

The budget outline also sets aside $250 billion for stabilizing the financial system, which is net of the $750 billion that will be spent. In other words, the government is no longer expecting to recover all of their investment as the previous administration promised.

The budget proposal includes $634 billion for a health care reform reserve fund. This will be paid for in two ways. First, top tax payers would only be able to deduct 28% instead of their top income tax rate. This is expected to raise $318 billion over 10 years.

Secondly, by reducing payments to private insurance companies offering Medicare and reducing prescription drug prices the administration believes it will save $316 billion.

By letting Bush's tax cuts for the rich expire, Obama expects to raise $640 billion over 10 years. The other side of the coin, however, is that the tax cuts for the middle class and poor total $900 billion.

The President wants to make permanent the Making Work Pay tax credit, the child care credit and the newly enlarge college credits.

Every year Congress attempts to protect the middle class from having to pay the Alternative Minimum Tax by passing a "patch". Every year the "patch" is not included in the budget, this year it is.

Obama wants to tax the portion of profits paid to managers of hedge funds and private equity firms as ordinary income rather than as an investment gain, thereby subjecting it to much higher tax rates than the 15% capital gains rate. This could be worth $24 billion over 10 years.

Reducing limits on direct payments to farms that have over $500,000 in sales is expected to raise $10 billion over 10 years.

Obama's budget will call on Congress to create a cap-and-trade program in which companies would have to pay for permission to emit greenhouse gases. Revenue from the program is intended to pay for a $150 billion renewable energy fund among other things.

The new cap-and-trade program would pay for making the Making Work Pay credit permanent, which the White House estimates will cost $537 billion over 10 years.

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