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Economic Forecasts

The Obama Budget: What to Expect

Tax changes are likely, but health-care reform and emissions caps may have to wait.

You can look at any initial budget submission as an opening salvo -- or at least as a conversation starter. President Obama's $3.6-trillion budget proposal is so massive, and it represents such a sea change from the previous administration, that the debate promises to be heated and lengthy. Some issues -- such as health-care reform and curbing greenhouse-gas emissions -- may take most of a term to settle. But we do have a sense of where the discussion is headed on some key issues.

Taxes. Single taxpayers earning more than $200,000 a year and couples earning more than $250,000 are going to pay more. The top tax rate will almost certainly jump from 35% to 39.6% at the start of 2011.

The budget would cap itemized deductions, such as those on mortgage interest and charitable giving, at a 28% rate (compared with 35% currently). But that will be a tough sell, given the dire straits of the housing industry and a wide swath of nonprofits whose endowments and funding have been hard-hit by stock-market losses. Calculations from Deloitte Tax show that a married couple with two children and a $500,000 annual income would owe about $11,000 more in taxes if all of the budget's tax provisions were enacted.

But middle-income taxpayers would see lower tax bills as cuts that were part of the recent economic-stimulus legislation (including a credit worth up to $400 for individuals and $800 for couples) become permanent.


Deloitte calculates that a married couple with two children and an income of $125,000 a year would pay nearly $4,000 less in taxes, thanks to the Making Work Pay credit and a long-term fix for the downward creep of the alternative minimum tax.

Investments. Capital-gains rates for high earners could jump back up to 20% in 2011 from 15% now; ditto for the rate on dividends.

Health care. Half of the $630 billion over ten years earmarked as a down payment on health-care reform is slated to come from tax hikes on top earners. Higher-income Medicare participants would also pay bigger premiums for drug benefits. Revamping Medicare Advantage, a private alternative to the traditional government plan, could lead to fewer benefits for Advantage participants. But the 80% of Medicare enrollees in the traditional plan could expect premiums to be lower than they would have been.

Retirement. The budget lays the groundwork for workers to be automatically enrolled in their employer's retirement-savings plan, or in a direct-deposit IRA if the employer has no savings plan. Workers could opt out, but inertia could end up boosting participation rates to 80%. Families earning less than $65,000 could see an expansion of the Saver's Credit with a 50% match on the first $1,000 of retirement savings.

Education. You can count on the $2,500 college-savings tax credit, enacted as part of the stimulus bill, becoming permanent. Need-based Pell Grants could grow to a maximum $5,550 for the 2010-11 school year, be indexed to inflation thereafter, and receive guaranteed funding each year.