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President's Deficit Reduction Proposal

The Issue
President Obama released in September 2011 details of a “balanced” deficit reduction plan of spending cuts and tax increases that would reduce the deficit by $3.5 trillion over the next decade. Overall, the president's proposal includes:

  • $580 billion in savings from mandatory programs
  • $430 billion in savings from lower interest payments on debt
  • $1.1 trillion in savings from drawing down war efforts in Iraq and Afghanistan
  • $1.5 trillion in new revenue from tax increases and tax reform
  • Includes savings and offsets from the American Jobs Act
  • Assumes $1.2 trillion in deficit reduction from spending caps enacted by the Budget Control Act
  • U.S. Postal Service reform

IS POSITION
The IS Board of Directors has adopted Guiding Principles on Deficit Reduction and Tax Reform that will be used to guide IS analysis and commentary on budget, deficit reduction, and tax proposals

The Guiding Principles address spending and tax policy, and build on the premise that, as a matter of justice, fairness and effectiveness, steps taken to address the nation’s fiscal challenges should favor policies that will not exacerbate income inequality or increase poverty.

IS Guiding Principles on Deficit Reduction and Tax Reform (Download a printer-friendly version)

BACKGROUND

Highlights of the President's Deficit Reduction Proposal

General Principles

  • Reduces the deficit by roughly $4.4 trillion over 10 years - when adding $1.2 trillion in savings from previously enacted spending caps.
  • Balance of spending cuts, tax changes, and mandatory program reforms.
  • Calls for comprehensive tax reform.
  • Institutes the "Buffett Rule" - Individuals earning over $1 million cannot pay a smaller proportion of their income in taxes than individuals with lower incomes.

Tax Reform

  • Calls for comprehensive tax reform that follows five principles:
    • Lower tax rates
    • Cuts corporate and individual tax expenditures
    • Adheres to the "Buffett Rule"
    • Boosts job creation and growth
    • Reduces the deficit by at least $1.5 trillion
  • Allows the 2001 and 2003 tax cuts for high-income earners to expire at the end of 2012.
  • Assumes the reinstatement of the 2009 parameters of the estate tax ($3.5 million exemption; 45 percent rate) in 2013.

Spending

  • $1.2 trillion spending reduction from discretionary spending caps imposed by the Budget Control Act.
  • $1.1 trillion spending reduction from drawing down involvement in the Iraq and Afghanistan wars.

Mandatory Programs

  • $248 billion in Medicare savings
    • $224 billion of the total from reducing overpayments
    • No changes would affect beneficiaries until 2017
  • $72 billion in savings from Medicaid
  • $250 billion in savings from other mandatory programs
    • $33 billion from reducing agriculture subsidies and programs
    • $42.5 billion in reforms to Federal employee benefit programs
    • $4.1 billion from unused government assets
    • $92.2 billion from restructuring government operations and liabilities
    • $77.6 billion from reducing waste, fraud, and abuse

U.S. Postal Service Reform

  • Relieves USPS of nearly $20 billion in retirement and health care obligations
  • Pays for upfront solvency relief through $18.5 billion in savings over 10 years
    • Reduces mail delivery service from 6 to 5 days
    • Authorizes increases in postal rates
    • Institutes a buyout program for postal employees

Job Creation

  • Assumes the enactment of the American Jobs Act
  • Cost of job creation offset by $479 billion in revenue raisers
    • 28 percent cap on itemized deductions and exclusions, including the charitable deduction, for individual taxpayers earning over $200,000 a year ($250,000 for families) - $410 billion over 10 years
    • Tax "carried interest" as ordinary income - $13 billion over 10 years
    • Repeal oil and gas tax preferences - $41 billion over 10 years
    • Modify rules for corporate jet depreciation - $5 billion over 10 years
    • Modify rules for dual capacity taxpayers - $10 billion over 10 years

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