March 20, 2012 / 2:02 PM / 5 years ago

UPDATE 1-U.S. Republican budget targets tax reforms, Medicare

* Deficits of $3.13 trillion over the next 10 years

* Savings from dismantling healthcare law, other programs

* Plan has little chance of becoming law

By David Lawder

WASHINGTON, March 20 (Reuters) - U.S. House Republicans unveiled an ambitious plan on Tuesday to cut and simplify taxes, slash spending and make a fresh run at overhauling the Medicare health program in a bid to draw a stark election-year contrast between their budgetary vision and that of President Barack Obama.

While it has little chance of becoming law, Republicans in the House of Representatives are looking for the plan from Congressman Paul Ryan to provide a party-defining lift to their re-election fortunes in November.

After a string of debacles ranging from last summer's debt-limit standoff to a near-revolt over extending a payroll tax cut, Republicans want to get back to their core message of shrinking the size of government. They claim an advantage over Obama on spending, debt and taxation and intend to use Ryan's budget plan to exploit it.

Where Obama wants to raise taxes on the wealthy and boost near-term spending on infrastructure and education, the Republicans want to cut taxes and spending on healthcare and social safety net programs -- benefits used more by the poor and middle classes.

The Republican budget plan would produce deficits totaling $3.13 trillion over the next 10 years -- less than half the $6.39 trillion in deficits the Congressional Budget Office says Obama's fiscal 2013 budget plan would rack up.

The Republican plan claims to put U.S. debt on a downward path, to 62.3 percent of U.S. economic output by 2022, versus Obama's 76.3 percent, which is slightly above current levels.

Ryan said in the document that U.S. debt growth, if left unchecked, would spark a debilitating European-style debt crisis.

"The growing possibility of such a crisis is creating debilitating uncertainty about the future, hurting job creation and economic growth today," he wrote.

DISMANTLING HEALTHCARE REFORM

The Republican budget achieves much of its deficit-reduction goals through savings gained by dismantling Obama's 2010 healthcare reform law and by turning social safety net programs like food stamps and the Medicaid program for the poor into block grants for states.

After proposing last year to convert Medicare into a voucher-like program to allow seniors to purchase private health insurance, Ryan has modified his reforms in a bid to blunt criticism that it would shift too many costs onto the elderly.

The new plan offers so-called premium support to allow beneficiaries to purchase either traditional Medicare or competing plans through a government-run exchange.

Republicans may soften the Ryan Medicare reform a bit to preserve a fee-for-service plan, but political strategists say that the party will still struggle to sell it to older voters who worry about their benefits.

Democrats are once again ready to pounce on the Ryan plan and tell voters it would mean "the end of Medicare as we know it," in the hopes they can unseat Republicans as they did last year in a special election for a conservative upstate New York district.

BRASH REFORMER, VP CANDIDATE?

But the political risk on Medicare has not daunted Ryan, the 42-year-old House Budget Committee chairman who fashions himself as a brash young reformer determined to shrink government.

Known for his slick YouTube videos to illustrate his dire views of the U.S. debt trajectory and for slipping in iPod earbuds sometimes when reporters are around, Ryan has kept the debt debate on the boil since Republicans took control of the House two years ago.

The budget plan gives Ryan, who is frequently mentioned as a potential vice presidential candidate, a huge platform to influence the party's direction and set the agenda for the election-year spending debate.

But many conservative Republicans, including those backed by the Tea Party movement, wanted Ryan's budget to contain even deeper cuts to discretionary spending now.

They were pushing to go below fiscal 2013 discretionary caps agreed with Democrats last August by as much as $116 billion, but the Ryan budget settles on a $18.4 billion reduction. Democrats warn that even the smaller cut breaks last year's debt-limit agreement meant to keep fiscal peace and risks a government shutdown by causing conflict over spending bills.

Some conservative Republicans may balk at the lower level, making House passage less certain, but the plan does shield defense and security spending from automatic spending cuts that are scheduled to kick in next January.

The Ryan plan contains another element popular with Republicans across the board: tax reform. It proposes to cut top rates for individuals, paring back the number of tax brackets to two - 25 percent and 10 percent - from six now.

The current top rate is 35 percent, but it is set to rise to 39.6 percent at the beginning of next year if the tax cuts enacted during President George W. Bush's presidency are allowed to expire.

It also would push through a corporate tax reform plan that would lower nominal tax rates to 25 percent from about 35 percent and largely eliminate taxes on U.S. companies' overseas profits.

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