Obama budget sets up election-year tax fight

President Barack Obama discusses about the economy at Fire Station Number Five in Arlington, Virginia February 3, 2012.

WASHINGTON (Reuters) - President Barack Obama called on Monday for new spending to boost growth and higher taxes on the rich, laying out an election-year vision for America in a budget that drew heavy fire from Republicans for failing to curb huge deficits.

Obama's 2013 spending proposal is expected to go nowhere in a divided Congress and is widely seen as more of a campaign document that frames his economic pitch to voters and seeks to shift the focus from deficits to economic growth.

It fleshed out a major theme of his re-election campaign: "economic fairness." Obama wants wealthier Americans to bear more of the burden of slashing a federal deficit that was a trillion plus dollars for a fourth year in a row.

The $3.8 trillion budget proposal is a "reflection of shared responsibilities," the Democratic president said at a campaign-style event in Annandale, Virginia, referring to his call for a minimum 30 percent tax on millionaires.

Obama would like to use revenue from the so-called "Buffet Rule," named after billionaire investor Warren Buffett, to replace the Alternative Minimum Tax, which is aimed at ensuring the wealthy pay at least some tax but is now catching many middle class taxpayers.

In one of his best platforms to lay out his economic priorities before the November 6 election, Obama called for more than $800 billion for job creation and infrastructure investment, including billions of dollars for roads, railways and schools. Analysts were skeptical of the proposals.

"This is all politics; there is no fundamental strategy. This does not answer any of the warnings we saw from S&P," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts.

Standard & Poor's ratings agency last year cut the United States' top-notch AAA credit rating, citing concerns that Washington lacked the political will to tackle rising debt levels.

The annual budget deficit was projected at $1.33 trillion in fiscal 2012, or 8.5 percent of gross domestic product, falling to $901 billion in 2013, or 5.5 percent of GDP.

"The president's budget is a gloomy reflection of his failed policies of the past, not a bold plan for America's future. It is bad for job creation, our economy, and America's seniors," said House of Representatives Speaker John Boehner, the top Republican in Congress.

Republicans also highlighted Obama's pledge in 2009 to halve the deficit by 2013, a target that he has failed to meet. The White House argues the depth of the recession he faced when he took office demanded emergency spending, and that it was more important to protect growth than impose austerity measures to trim the deficit.

Obama's plan sets aside money to hire more teachers, police and firefighters and invest in manufacturing, while extending tax breaks to spur hiring, in an appeal to voters who remain worried about the economic recovery.

"At a time when our economy is growing and creating jobs at a faster clip, we've got to do everything in our power to keep this recovery on track," Obama said.

Republicans paint the president as a tax and spend liberal while Obama, who will take his plan on the road later this week in a trip to Wisconsin, California and Washington state, casts them as the party of the rich.

The budget projects deficits remaining high this year and next before starting to decline, meaning more borrowing that will add well over $7 trillion to the national debt over the next decade.

DEAD ON ARRIVAL

Congress is free to ignore the plan and Republicans, who control the U.S. House of Representatives, have made clear that it will be dead on arrival as their party prepares an election battle over taxes, spending and the size of the government.

Presidents' budgets are frequently ignored by Congress, which writes the laws that appropriate the funds to keep the government running, and his last budget was also not passed.

Many of the ideas have been outlined in Obama's' previous budgets or laid out by him in September. These include tax increases to raise $1.5 trillion and spending cuts that together would lower the deficit by $4 trillion over 10 years.

"Obama's budget is an insult to the American taxpayer," said Mitt Romney, frontrunner for the Republican nomination to face Obama in the November presidential election and one of the richest men to ever run for the White House.

Obama urged that George W. Bush-era tax breaks for families earning over $250,000 a year be allowed to expire at the end of 2012, while capping deductions these wealthier Americans are allowed to make for things like mortgage interest payments.

He also proposed raising the tax they pay on dividends to the level of their income tax, which would advance to almost 40 percent from 35 percent if the tax break expires, instead of the capital gains rate that is currently 15 percent.

That is roughly the tax rate Romney will pay this year, because most of his income is from investments. Obama also reiterated his plan to end a so-called carried interest loophole that allows fund managers' earnings to be taxed at that level.

Obama plans slashing $487 billion from defense spending, the first cuts since 1998, and outlined $800 million to aid transformation in the Middle East and north Africa after last year's Arab Spring uprisings.

Republicans complained Obama was taking credit for $1 trillion in deficit reductions that were already in place from a bipartisan deal last year to raise the U.S. debt limit.

They also dismissed as a "gimmick" $800 billion in savings from ending wars in Iraq and Afghanistan that meant counting money that was never going to be spent.

(Additional reporting by Richard Cowan, Susan Heavey, Caren Bohan, David Lawder and Kim Dixon in Washington, Chris Reese in New York; Editing by Ross Colvin and Cynthia Osterman)