Proposed Tax Deduction Cuts: A Smokescreen for Bigger Government

$866 billion in health care reserve fund not mentioned in Obama budget – all taxpayers to pick up the tab

By Penny Wise

Barack Obama made tax increases for wealthy Americans and tax cuts for everyone else a centerpiece of his presidential campaign, so it should come as no surprise that his first budget as president proposes letting the Bush tax cuts for couples making more than $250,000 a year ($200,000 a year for single taxpayers) expire in 2011. Under President Obama’s proposed budget, couples making more than $250,000 a year will see their tax rate return to 39.6% from the current 35%.
What has surprised many Obama supporters is his lesser-known campaign promise to also reduce all tax deductions, including deductions for charitable giving. Couples making more than $250,000 a year would see their itemized tax deductions reduced from the current 35% to 28%.
Non-profit groups and charities aligned with President Obama have been shocked by this proposal because they believe that donations will decrease if it is enacted. Not surprisingly, these groups have declared that this provision will not survive in Congress.
While the fight over charitable donations may end before it begins, this proposal from the White House should set off alarm bells among those interested in containing the size of the federal government. It is now apparent that President Obama’s campaign promise of tax increases for wealthy Americans does not necessarily mean these funds will be used to pay for tax decreases for everyone else, or even be used to reduce the federal budget deficit.
Instead, the increased revenue for reducing the itemized deduction rate will be used exclusively to fund “in part” a reserve fund to enact health care reform:
Reducing Itemized Deduction Rate for Families With Incomes Over $250,000. Lowering health care costs and expanding health insurance coverage will require additional revenue…as the Administration works with the Congress to enact health care reform. The Administration’s Budget includes a proposal to limit the tax rate at which high-income taxpayers can take itemized deductions to 28 percent—and the initial reserve fund would be funded in part through this provision. This provision would raise $318 billion over 10 years.
The partial cost of the reserve fund to enact health care reform in the administration’s budget is $634 billion, leaving $316 billion in funding from health care savings. The total cost of the reserve fund, which is not in the budget, is estimated to be $1.5 trillion.
This tax item in the budget is just a smokescreen for big government getting even bigger, with the initial funding provided by wealthy Americans through expiring tax cuts and reduced tax deductions. While taxpayers making less than $250,000 a year would not contribute to the reserve fund, they certainly will see increased taxes if the $316 billion in health care savings do not materialize. The total size of this program is so large that even wealthy Americans will not be able to pay for all of it.
The Obama administration wants to give middle-class Americans the “gift” of a huge health care program, starting with a 21% “down payment” from taxpayers who make more than $250,000 a year. The president is bargaining that all Americans, and not just the wealthy, will be willing to pay the remaining $866 billion to enact it. President Obama, going against the advice of his top political and economic advisors, may have calculated incorrectly that all Americans will be willing to pick up this tab for creating even bigger government.


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