Obama budget

My take on the Obama budget released today. Spending on infrastructure. Money will only be approved by local officials if it is a new structure of some type so they can have a ribbon cutting ceremony and that requires planning and as we found out there are no shovel ready jobs. To do something practical like fixing potholes could be done right away but there is no glory in that for the local mayor. The president learned his lesson and this time he specifies repairs to highways, bridges, transit systems and airports. Spending on early education. This is a supplement to the head start program which is government baby-sitting for 3 to 5 year olds. The new plan is for more baby-sitting but this time for 4 year olds. Head start has proved a waste as all the gains made are lost by third grade. The advantage to these programs is the free meals and providing jobs for pre-school teachers and of course free baby-sitting. This program will be paid for by taxing cigarettes and this is a regressive tax hitting the poor people the hardest. This will take money from the poor and give it to the poor with the administrators taking a share and the government getting the credit for the program. They will love this. Spending on non-defense research can be a good thing if projects are merit based and not crony based. Good luck with that. Changing how increases in social security are calculated is a start. Right now the adjustments are based on the consumer price index and this will change to a chain method. This takes into account the change in spending habits when the price of one item increases. For example if the price of beef goes up people buy more pork. This adjusting by consumers lowers the price index so future increases will be less. This will lower the average social security recipients payment about $350 per year by 2020. That doesn’t sound like much but since there are so many people receiving government money it comes to 230 billion over ten years. I feel they can keep this but should also include means testing for social security. Doing that would require people who have lots of retirement money to take less social security. It could be set up for couples who have $200,000 of retirement income to take a reduce social security benefit and by $250,000 the benefit would be zero. There is a proposal to cap itemized deductions at a 28% tax rate. For example a wealthy person who deducts mortgage interest saves 39% but with the new rule would save only 28%. If you pay $30,000 in home mortgage interest this would save you 39% of $30,000 or $11,700 in taxes verses the Obama rule of 28% of $30,000 or $8,400. This would not affect the rich, rich since mortgage interest deductions are already eliminated for mortgages that are more than one million. This will hit people earning between $300,000 to $500,000 and bring in $529 billion over ten years. Looks like a good idea to me. He institutes the Buffett rule which states that people income over one million after deductions will be taxed at 30%. This is an indirect way to raise the capital gains tax from 20% to 30%. There are pros and cons to this but I see it as a good thing and it will bring in about 50 billion over ten years. He places a limit on deduction for private pension plans like IRA and 401K. After you have 3 million in the account you can no longer get a tax deduction on new money. This does nothing but if it opens the door to lowering the 3 million limit it could be the most important part of his plan, so look for that to happen in the future. As it stands it will only bring in about 9 billion over ten years. IRA’s have only been around since 1974 and for most of those years you could only contribute $2,000 so you couldn’t get close to 3 million. Many people when they retired transferred their company plan to an IRA and these can have a lot of money in them. His plan would eliminate carried interest. This is OK and will hit hedge fund managers. Recall that a hedge fund is a pile of money put in by private investors and they invest in business where they can make money. They like this since there are no government regulations on their actions. If they invest a billion in a company and make 2 billion they pay capital gains tax on the profit and that is as it should be but they sometime uses their own expertise to make profits and receive payment for that and they also call that capital gain. The rule change will call that money earned income and it will be taxed at 39% instead of 20%. That makes sense but the expected money from this change will be reduced if they start the Buffett rule because it will be taxed at 30% There will be $200 billion in unspecified defense cuts and $400 billion from Medicare mostly by cutting payments to hospitals and drug companies. Another 600 billion in non-defense cuts including agriculture and unemployment insurance. The law says the president’s budget must be presented by Feb 4th and it came out today two months late. I suggest you not be two months late on filing your income tax as you are not the president.