This is a rush transcript from "Your World With Neil Cavuto," February 26, 2009. This copy may not be in its final form and may be updated.

NEIL CAVUTO, HOST: So did the president just change his definition of who is rich? It used to be that anyone earning over $250,000 a year fit that category.

But, in his first budget, the president says for his promised health care expansion by cutting deductions for those paying taxes at both the 33 percent and the 35 percent rates. Now, this year, the 33 percent rate starts with couples with taxable income of $208,850.

White House Budget Director Peter Orszag with me right now.

So, Director, maybe you can put this issue to bed. What is it going to be? Where do you start limiting deductions?

PETER ORSZAG, DIRECTOR OF OFFICE OF MANAGEMENT AND BUDGET: I think it is pretty clear that proposal would kick in, in 2011.

In 2011, that threshold should apply at about $250,000. It is perfectly consistent with what the president campaigned on.

CAVUTO: All right. So, the 33 percent rate right now, if it moves to 36 percent — but 33 percent right now is around $208,000, $209,000. What is it going to be at 36 percent in 2011?

ORSZAG: The threshold should be at around $250,000 in income. So, again, this is perfectly consistent with what the president campaigned on.

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ORSZAG: I think there has been confusion about when this proposal would kick in. And it's very clear it would not kick in until 2011.


CAVUTO: Then, Director, I am confused, then, because, right now, 33 percent, to start, is at $208,000, $209,000. You're saying, when it's up to...


ORSZAG: That goes up — that goes...

CAVUTO: Go ahead.

ORSZAG: That goes up over time. Under the existing tax code..


CAVUTO: OK. So, understood, so that, in 2011, it will be around $250,000?

ORSZAG: Something like that, approximately in that range, yes.


So, can you tell me now that there will not be a deduction cut for anyone making less than $250,000?

ORSZAG: That is correct. That is the way that this proposal is structured, again, kicking in, in 2011 and thereafter.

CAVUTO: OK, so nothing kicks in, in 2010?

ORSZAG: That is correct.

CAVUTO: OK. So, I'm going to be...


ORSZAG: I think folks need to actually look at the budget document, where this is clearly laid out, but I'm happy to explain it, also.

CAVUTO: Actually, I did look at the budget document, and it is not clearly laid out.

But let me ask you this. Since you're the brain here, you are now swearing to me on a stack of White House bibles that no one is going to see their taxes increased if they make under $250,000, right?

ORSZAG: Again, let me just be clear. This proposal only affects the top 5 percent of taxpayers. It kicks in after 2011. And it is targeted at — or it applies to those earning $250,000, a quarter-million dollars, a year, or more.


So, when the president was in the beginning talking about "I'm going to only hit the top 2 percent," it just might be just numerical semantics here, Director, but it is the top 5 percent, right?

ORSZAG: It is likely to be less than that.

But, again, let's focus on the big picture here. For 95 percent of working families, there's going to be a net tax reduction. That seems to be lost in much of this discussion.

CAVUTO: All right. But it's fair to say that the population on which you are going to be raising taxes account for the majority of the taxes that you raise, right?

ORSZAG: That is — that is right. The revenue changes are focused on those making more than a quarter-million dollars a year.

CAVUTO: Understood.

All right, now, let me ask you about this, because, besides taking the 33 percent rate to 36, and the 35 percent rate eventually to 39.6, you're also, for that upper-income group — and I guess solely that group — raising capital gains on dividends as well for top earners from 15 percent to 20 percent.

Don't you think that those who would be inclined to invest in the market, Director, would look at that and say, I have no compunction to buy in this market, none at all?

ORSZAG: Well, I don't know. These are the tax rates that applied during the 1990s, and we had a very strong stock market performance and a strong economy throughout that decade. So, taxes are not the only thing that drive either investment or economic performance.

We are trying to get the economy moving again. And we're also — we also see these very large deficits out over time, and we need some shared sacrifice in trying to get them down.

CAVUTO: Well, you mention shared sacrifice, Director. And maybe Congress is not hearing you, particularly those in your own party, because no sooner had the president stated that in a very eloquent, boffo speech, than just, what, 18 hours later, they pass a spending bill where they — they jack it up 8 percent from last year. It is loaded with close to 8,000 earmarks. Republicans did this, too, by the way.

And I am just thinking, is anyone listening to your boss?

ORSZAG: Well, that omnibus bill is last year's business. We hope to move past it. I think, as we move into next year's budget, which is what...


CAVUTO: Yes, but you would think they would take — but you would think they would take an example, and say, wait, you know, the big guy told us to cool it on this nonsense. They not only did not cool it; they added to it.

ORSZAG: Again, last year's business — I think what we're trying to do is, moving forward, get the budget back into the kind of structure that the president talked about.

CAVUTO: He is not angry at Democrats who, the very next day, abandoned his very principles he laid out?

ORSZAG: Again, that bill applies to — basically, it is — I hate to be — keep repeating myself, but it's...

CAVUTO: Yes, I know. It was an old appropriations measure left over from the last year.

ORSZAG: It's sort of a done deal.

CAVUTO: I know. I know.

ORSZAG: It was a done deal.

CAVUTO: But, nevertheless, they did not even bother to pick up on what you said.

ORSZAG: Is it everything that the president would have wanted it? No. Is it last year's business, and we just need to move on? Yes.

So, why don't we do that?


Let me ask you, because a number of people, sir — the National Tax Office: "Say what you will about the Bush tax cuts favoring the rich. What President Obama is doing is just becoming punitive."

What do you make of that?

ORSZAG: Oh, I don't — I don't think so at all.

I mean, again, we are returning to the tax rates that applied during the 1990s. I think all Americans, including high-income Americans, did quite well during that decade.

CAVUTO: Well, you would argue this is a slightly different period we're through now, right?

ORSZAG: Right, which is why a lot of these — why these tax changes don't occur until 2011.

There also seems to be a lot of assertions that we are raising taxes during a recession. These tax changes don't apply until 2011, at which point, let's — for all of our sake — let's hope that the economy is recovering again.

CAVUTO: But you have responsibility on the cover of this budget, Director. And I know you have been working very hard on it. And I know, longer-term you think there is a good shot at halving the budget deficit.

But, even if you were to get the tax increases you're looking to do, and even if you were to pull out of Iraq — you know, we have crunched the numbers — you can't get there doing what you are proposing. So, how did you arrive at that — at that number?

ORSZAG: I'm not — I am not exactly sure what numbers you are crunching. Again, these are all laid out. You have the document. You can look at table S-2. You can look at table S-6.

The deficit reduction occurs through four main mechanisms. One is, as the economy recovers, the budget does improve.



CAVUTO: So, you have built in — you have built in assumptions about growth that maybe we did not, and that you are thinking that that will compensate for...

ORSZAG: By 2013? By 2013, let's hope the economy is growing again.

CAVUTO: All right. Well, you have got essentially two years to do that, then, right, in '11 and '12, to get the results you want in '13, because you're not going to get it in '09 and '10, right?

ORSZAG: During — during an economic downturn like we're experiencing, the deficit get elevated. And that is not only natural; it's also beneficial, because it helps bring the economy back up to the potential output level.

In other words, the key problem that we face right now is the gap between how much the economy could produce and how much it is producing.

CAVUTO: All right.

ORSZAG: The whole point of the Recovery Act is to fill in that gap. And part of that means a slight — a temporary elevated deficit.


CAVUTO: Director Orszag, thank you very much.

ORSZAG: Thanks for having me.

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