Obama Offer Raises Tax Increase Threshold to $400,000

U.S. President Barack Obama tells students at the University of Michigan in Ann Arbor on Jan. 27, 2012, that he is pressing Congress for new initiatives on college affordability.

President Barack Obama made a new budget offer that would raise taxes by $1.2 trillion and increase tax rates for households earning more than $400,000 a year, up from $250,000, said a person familiar with the talks.

Obama’s plan would cut $1.22 trillion in federal spending, including interest savings, said the person, who spoke on condition of anonymity. It would change the inflation measure used to calculate Social Security benefit increases. In his offer, Obama would increase the U.S. debt limit for two years.

Obama and House Speaker John Boehner are negotiating to avert more than $600 billion in tax increases and spending cuts set to start in January. Obama presented the offer to Boehner today, the person said.

Obama and Boehner met for 45 minutes today at the White House for the third time in nine days as they try to prevent the so-called fiscal cliff.

Boehner spokesman Brendan Buck, in an e-mailed statement tonight, called the offer “a step in the right direction” though he said it “cannot be considered balanced.” He said the offer included $1.3 trillion in revenue and $930 billion in spending cuts.

That calculation doesn’t count $290 billion in lower interest payments as part of the spending cut. Interest savings are a byproduct of tax and spending decisions. Buck said the speaker hopes to continue negotiations.

Photographer: Bill Pugliano/Getty Images

U.S. President Barack Obama tells students at the University of Michigan in Ann Arbor on Jan. 27, 2012, that he is pressing Congress for new initiatives on college affordability. Close

U.S. President Barack Obama tells students at the University of Michigan in Ann Arbor... Read More

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Photographer: Bill Pugliano/Getty Images

U.S. President Barack Obama tells students at the University of Michigan in Ann Arbor on Jan. 27, 2012, that he is pressing Congress for new initiatives on college affordability.

Weekly Conference

Boehner and Majority Leader Eric Cantor will give House Republicans an update on the negotiations at their weekly conference meeting tomorrow, according to a leadership aide who requested anonymity to talk about the leaders’ plans.

Obama and Boehner are still far apart on where to draw the line on tax rates, how to address the debt limit and whether stimulus spending should be included in a budget deal.

Obama’s offer would set the top tax rates on dividends and capital gains at 20 percent, the person said. Combined with tax increases from the 2010 health care law scheduled to take effect in January, the top rates would be 23.8 percent.

Obama would return the estate tax to 2009 parameters, with a $3.5 million per-person exemption and a 45 percent top rate.

The dividend proposal matches the bill Senate Democrats passed in May and would raise less money than Obama’s budget, which called for taxing dividends as ordinary income. The estate proposal is less generous than the parameters backed by many Senate Democrats, who would extend the $5.12 million exemption and 35 percent top rate.

Recurring Debates

Obama’s offer includes several details that hadn’t previously been publicly under consideration. His proposal would end three recurring debates that occur in Congress over expiring provisions.

Obama would permanently extend an annual “patch” that prevents expansion of the reach of the alternative minimum tax. He would end a scheduled payment cut to doctors under Medicare. Also, he would permanently extend dozens of tax breaks that routinely expire, such as the research and development tax credit and the ability to deduct state and local sales taxes.

His plan would achieve $400 billion in savings from health programs, $200 billion from other so-called mandatory spending programs and another $200 billion from other programs, half in defense.

About $130 billion of the spending savings would come from switching the way that annual inflation increases for Social Security benefits are calculated. Obama’s offer would include protections for the most vulnerable recipients, the person said.

While Senate Majority Leader Harry Reid, a Nevada Democrat, has declared Social Security off the table in a year-end budget deal, the CPI revision has been a centerpiece of most major bipartisan efforts to trim the U.S. debt.

To contact the reporters on this story: Hans Nichols in Newtown at hnichols2@bloomberg.net; Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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