Obama punts tax revamp to raise revenue

Vowing to veto any cuts to Medicare unless Congress hikes taxes on companies and the wealthy, the Democratic president’s recommendations set the stage for an ideological fight with Republicans that will stretch through Election Day 2012.

“I will not support any plan that puts all the burden on closing our deficit on ordinary Americans,” Obama said. “We are not going to have a one-sided deal that hurts the folks who are most vulnerable.”

With polls showing most Americans unhappy with his economic leadership, Obama’s re-election hopes could hinge on his ability to convince voters that Republicans represent the rich, not the middle class. That was the main theme of his remarks on Monday, in which he repeatedly said all Americans must pay their “fair share” of taxes.

Republicans have consistently opposed any measures resembling tax hikes, saying they will hurt the struggling U.S. economy by increasing the burden on job-creating businesses.

“Veto threats, a massive tax hike, phantom savings, and punting on entitlement reform is not a recipe for economic or job growth,” said Republican Senate leader Mitch McConnell.

Obama’s speech underscored a more aggressive approach to defend Democratic principles after two budget fights earlier this year in which he ended up compromising with Republicans and suffering criticism for doing so from his liberal base.

“This is purely politics, aimed at Obama’s demoralised base. It undoubtedly has been poll-tested, so now Obama has a populist campaign issue. There’s obviously no chance this could pass (on a vote in Congress),” said Greg Valliere, chief political strategist at consultancy Potomac Research Group.

Super Committee

Obama’s plan proposes $3 trillion in savings over the next decade with roughly half of those savings coming from higher tax revenues.

His recommendations will go to a congressional “super committee” charged with finding deficit savings of at least $1.2 trillion by November 23. Congress must then vote on the panel’s proposal by December 23 or automatic spending cuts will be triggered across government agencies, beginning in 2013.

Investors want evidence that Washington’s political leaders are capable of tackling the towering US deficit and the country’s mounting debts, after ratings agency Standard & Poor’s cut the US AAA rating in August. Agencies have threatened fresh action if Washington fails to produce a credible plan for addressing long-term debt.

Obama’s plan does not raise the eligibility age for Medicare recipients, something he proposed during debt ceiling negotiations with House Speaker John Boehner over the summer.

Instead, he is proposing something more palatable to the left - $248bn in Medicare savings, the bulk of which will come from reducing overpayments to health care providers.

Medicare and Medicaid are viewed by analysts as the biggest contributors to long-term US deficits, which voters see as a key issue in the election.

The US budget deficit in 2011 is expected to be about $1.3 trillion.