Breaking Down Obama's Budget

Perhaps the most obvious of financial truisms is that there's no such thing as a one-size-fits-all national budget. And with the economic forecast looking more incoherent than ever, it's also the most problematic of truisms for President Barack Obama and his $3.8 trillion spending plan for 2011.

 [See Obama Retirement Proposals Tell a Sad Story.]

On the one hand, the economy is stumbling back from a savage recession, helped along, the Obama administration vigorously claims, by ambitious government stimulus plans. But at the same time, record deficits have forced the administration to temper its spending and to toe a contentious line.

As was expected, the budget that emerged from these dynamics has unleashed a mixed bag of emotions and compromises. Wealthy Americans and big business bemoaned yesterday an estimated $1.9 trillion in tax increases, even as small businesses and low- and middle-income families gladly accepted a host of proposed financial incentives. Meanwhile, NASA buried its hopes of getting back to the moon and in return was given an amplified budget. Here's a more complete look at the winners and losers in the president's budget:

Losers

The moon. Obama's budget would put an end to Constellation, a NASA program whose goal it is to get Americans back to the moon by 2020. Critics have called the proposed elimination of the program a major blow to NASA and to space exploration in general. 

"The president's proposed NASA budget begins the death march for the future of U.S. human space flight. The cancelation of the Constellation program and the end of human space flight does represent change—but it is certainly not the change I believe in," Sen. Richard Shelby, a Republican from Alabama, said in a statement. 

Obama's new model for NASA involves an increased focus on the development of engines, fuel technology, commercial applications, and robotics. In fact, despite its plans to scrap Constellation, the Obama administration has actually proposed increasing NASA's overall budget. Over five years, NASA would get $100 billion. 

Howard McCurdy, a public affairs professor at American University and an expert on space policy, says that scrapping Constellation would not harm overall exploration prospects so much as it would draw attention away from the moon and toward more distant parts of the galaxy. "If the new model works, we might not want to go back to the moon," he says. 

The rich. Under Obama's proposal, Bush-era tax cuts would be allowed to expire for individuals making more than $200,000 per year and for married couples who earn more than $250,000. Obama has also proposed increasing from 15 percent to 20 percent the capital gains tax rate for Americans in those wealth brackets. 

"The tax hikes are basically on the rich," says Gerald Prante, an economist with the Tax Foundation. "They're the biggest losers." 

Meanwhile, Obama is also trying to reduce the tax breaks that families with over $250,000 get when they make charitable contributions. "Currently, if a middle-class family donates a dollar to its favorite charity or spends a dollar on mortgage interest, it gets a 15-cent tax deduction, but a millionaire who does the same enjoys a deduction that is more than twice as generous," the budget reads. "By reducing this disparity and returning the high-income deduction to the same rates that were in place at the end of the Reagan Administration, we will raise $291 billion over the next decade." 

In a related move, the budget would end the preferential tax treatment that hedge fund and private equity managers receive, forcing them to pay normal income taxes on their profits. Previously, they had been allowed to pay capital gains rates. This would bring in $24 billion in additional tax revenue over 10 years. 

Roberton Williams, a senior fellow at the Tax Policy Center, says that this plan predates the backlash that hedge funds have experienced in the wake of the Bernard Madoff saga. 

"I think it was a concern just because those folks were making lots and lots of money and being taxed at a very, very low rate relative to other high-income individuals," he says. "So it was raised mostly as an issue of high-income people facing low tax rates, not as an issue of [backlash] against the financial excesses that we saw." 

Banks, oil companies. Obama's much-anticipated bank tax also made it into the budget. The tax, which would be imposed on the nation's largest financial institutions, would produce $90 billion over the course of a decade. 

The budget also targets oil and natural-gas companies, which would lose $36.5 billion in tax cuts over 10 years. "We cannot continue to ignore the clean energy challenge and stand still while other countries move forward in the emerging industries of the 21st century," Obama said in the introduction to the budget. 

Prante says that the oil and bank taxes are both part of a larger populist agenda. "Like banks, they're not very popular," he says of oil companies. 

Winners 

Space commercialization. The budget gives NASA $6 billion over five years to use toward helping private companies build commercial ships capable of carrying humans into space. "NASA's not very good at manufacturing and running things in a conventional sense," says McCurdy. "They're not a very good airline company. So the concept is that as these technologies become mature and talent becomes dispersed, activities are spun off into the commercial sector." 

This funding could touch off a tidal wave of proposals from private companies that are eager to tap into the space industry. It also represents the shifting dynamics that NASA has been facing ever since the moon landing. 

"When we flew to the moon, the astronauts all wore [matching] suits and…worked fo NASA," says McCurdy. But since then, corporations have been gradually intruding. 

Small businesses. The spending plan would increase the Small Business Administration's 2011 budget by upwards of 20 percent. At the same time, it would also push up from $2 million to $5 million the maximum size of the SBA's signature 7(a) loans, which are given to startups and existing businesses. 

Meanwhile, community banks would get access to $30 billion to lend out to small businesses. The money would come from the funds that Wall Street firms have paid back to the government in the aftermath of the $700 billion bank bailout. 

[See Obama Courts Small-Business Owners.] 

Elsewhere in the budget, small businesses get a number of tax benefits, including breaks for companies that hire new workers. These measures, along with the others, keep up the tone that Obama set in the State of the Union, when he made small businesses a priority. 

"It appears that there's certainly a good amount of emphasis being placed on small businesses in this budget," says Molly Brogan, a spokesperson for the National Small Business Association. "I think overall it came out pretty well." 

Low- and middle-income Americans. The budget calls for a one-year extension of the Making Work Pay tax credit. This credit offsets Social Security payroll taxes and is worth $400 for individuals and $800 for married couples. Around 95 percent of the country's workers are eligible. 

At the same time, Obama is also looking to permanently extend the American Opportunity Tax Credit, which affects parents and students who are paying for college tuition. The credit gives $2,500 per year to single filers who make less than $80,000 and to married couples who earn less than $160,000. The budget would also increase tax breaks for families who have child-care expenses. 

Overall, though, the proposed credits do little to expand the safety net that low- and middle-income families already have. Instead, for the most part Obama is proposing an extension of his previous policies. "The proposals are not very different from what they were last year," says Williams.