House Stand Off on Tax Debt Deductions and Government Deficit Management

The stand off between the Republicans and Democrats on how to handle the issue of the raising government deficit continues to rock Congress. In a recent proposal by President Obama, the Democrats seem determined to have a lot of the tax deductions claimed by Americans today reduced and especially for the wealthiest 2%. The so-called “Tax Expenditure”, which is a term that has been in use over the years by tax “specialist,” is seemingly being adopted as the main area of contention. Tax Expenditure includes the deductions such as mortgage claims, charitable contributions, education, deductions by employers on Health Insurance, and lowered capital gain taxes.

Republicans say that they are not willing to discuss any form of tax hikes including a hit on tax expenditure as this translates to households paying more in taxes. According to a Republican proposal forwarded to the House by Paul Ryan, Chairman of the House Budget Committee, the Republicans suggested a cut on the Healthcare expenditure as an alternative to increasing the tax burden for American Households; the Healthcare that was pushed into being by the President Obama late last year. President Obama dismissed these proposals and said that Republicans were not keen at reducing the deficit, but are interested in changing the U.S. social compact.

On the other hand, the Democrats, championed by the president himself, are out to have a reduction in the tax debt deductions. They are keen at reducing the Bush tax cuts for individuals and households with an income over $250,000 a year by the end of 2012. In fact, Obama insists that he was dedicated to have the tax deductions for the “rich” reduced by 2011 but compromised his stand owing to a deal with Democrats in December 2010 to have these reductions pushed to 2012.

In his argument, Obama insists that people like Warren Buffet do not need any tax debt deductions. In fact, tax deductions such as a reduction on capital gain tax effectively resulted in Warren Buffet paying a lower tax rate than his secretary! Besides the current tax restructuring geared at offsetting the current deficit, President Obama is still eager to having an overall tax reform that would have long term impact on the tax structure of the United States. In these tax reforms, a broad reduction on the tax exemption and reduction is suggested that would then be absorbed by an overall reduction on tax rates.

Besides the issue of the Tax Expenditure, another looming issue that has draws equal attention from both sides of The House is Social Security. Both sides agree that something needs to be done urgently to manage the expected rise in the Social Security deficit as the “baby boomers” get to retirement age. The Republicans are calling on Obama to act fast while Obama is seeking to have a bipartisan team to look into the issue separately from the current deficit issue at hand. Some of the suggestions given on managing the expected Social Security deficit is by raising the age of retirement, increasing Social Security Tax, and reducing Social Security benefits for the wealthy.

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