Obama Will Get Most of What He Wants

03/03/2009 1:00 pm EST

Focus: MARKETS

Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

Knight Kiplinger, editor-in-chief of The Kiplinger Letter, says President Obama has the votes to get most of his controversial budget proposal, and business will have to adapt.

Will Congress give President Obama all he wants [in his new budget proposal]? Obviously not. But he’ll get a lot of it.

Higher taxes for top earners are a given. Obama promised this in the campaign, and Republicans don’t have the votes to stop him.

The Bush tax cuts will be allowed to expire in 2011, upping taxes on couples making $250,000 or more. The top rate will rise from 35% to 39.6%, [and there will be] higher rates, too, on capital gains and dividends—20% instead of 15% for top earners.
                
Plus, [there will be] new limits on all itemized deductions for high earners, essentially capping the value of deductions at 28¢ on the dollar vs. 35¢ today. Charitable groups are objecting, but some limits will go through.

Obama wants to keep middle-class cuts in effect, but not indefinitely. Revenue needs will eventually mean a wider swath of tax increases.
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[There’s also] a good chance for health reform—maybe this year. The tax hikes would help pay for universal coverage.

Work on a bill is already under way, and key groups are getting close to a consensus. Republicans will compromise rather than risk seeing the Democrats use a procedure known as reconciliation, which requires just 51 Senate votes, not the usual 60.

How much will it cost? A lot more than the $634 billion Obama carved out over ten years. Funding for the rest is in the White House’s “to be determined” file.

[Meanwhile,] Obama’s goal of cutting next year’s deficit in half in four years is realistic.
              
But mostly because the starting point is so high—$1.75 trillion this year and $1.2 trillion next, inflated by the stimulus and debt rescues. When they end, and the economy recovers, then a still-huge $533-billion deficit target will be doable.
               
Keeping deficits low will be harder, hinging on entitlement program reforms.

Obama’s budget [also] comes down hard on businesses, though not until 2011. Hardest hit: Multinational corporations, oil and gas firms, managers of private equity and real estate partnerships and some small business owners.
               
They’d see increases in taxes, and many would lose government subsidies. Student lenders, for example, would lose $4 billion a year in federal payments.

One change the budget proposes is to end low rates on carried interest, which accounts for the key earnings of venture capitalists and hedge fund managers. Obama also wants to close loopholes on foreign income, but he didn’t offer details.

Business groups are reacting angrily to the proposals, noting that Obama didn’t offer to cut corporate tax rates, the supposed trade-off for closing loopholes.

But business is unlikely to prevail. Obama has the votes he needs to force through most of his changes, though many specifics need to be worked out.

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