Tax Deductions 101: everything you need to know about the fiscal cliff plan

Dec 3, 2012


US President Barack Obama speaks before Speaker John Boehner (R-OH) Secretary of the Treasury Timothy Geithner (3rdR) and other cabinet members during a meeting on November 16, 2012 in Washington, DC. Credit: AFP/AFP/Getty Images

The federal government has less than one month until the United States falls off the so-called “fiscal cliff” of automatic tax hikes and deep spending cuts, which will occur on January 1 unless Congress agrees on a strategy to avoid the potential economic calamity.

The primary point of contention among members of Congress is that of balancing the budget through increasing tax rates on those who earn over $250,000 per year, limiting the amount of tax deductions, or a combination of the two. Democrats want to raise tax rates for the wealthy, while Republicans want to focus on closing tax loopholes and on capping the amount of deductions that Americans can take.

It is unclear if cutting back tax deductions alone would be an effective strategy. According to the Tax Policy Center, capping deductions at $50,000 per household would raise an extra $749 billion over a decade. That would be $300 billion more than the government would get from raising the top two income tax rates, as proposed by President Obama. Lower caps on deductions would raise even more.

What kind of long-term strategy might President Obama and Congress agree on before the Bush era tax rates expire in 2013? Are they letting cutthroat politics get in the way of our economic well-being?


Robertson Williams, senior fellow, The Urban-Brookings Tax Policy Center

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