Published for www.keithhennessey.com, December 3, 2012

I am going to describe the President’s proposal to Republican Congressional leaders, then react to the most important parts of it.  Secretary Geithner offered this proposal last Thursday.

This is a post for intermediate to advanced readers. Except where noted, all large numbers are for the next ten years.

President Obama’s opening bid

Items in bold are being labeled by the Administration as non-negotiable. Brackets show where I am unsure what they are proposing.

Arithmetic

This is how the Administration describes it.  I think this arithmetic is absurd and explain why below.

  • $4 trillion of deficit reduction relative to a current policy baseline;
    • $1 trillion comes from the discretionary spending caps enacted in the Budget Control Act of 2011;
    • $1 trillion comes from lowering the spending caps on Overseas Contingency Operations (aka Afghanistan and the remaining forces in Iraq);
    • $400 B comes from unspecified savings in mandatory spending; and
    • $1.6 T comes from tax increases.

Taxes

  • Raise top two income tax rates permanently;
  • Extend all other tax rates, credits, and related income tax provisions permanently;
  • Tax dividend income as ordinary income;
  • Estate tax: $3.6M exemption, 45% rate – These are the parameters that were in place in 2009.
  • Capital gains rate increases to 20%;
  • Extend the Payroll tax credit;
  • Extend bonus depreciation for business investment;
  • Permanently extend the Alternative Minimum Tax;
  • Permanently extend a package of routinely expiring tax provisions, mostly for businesses, known colloquially as tax extenders.

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