Governing
5:08 pm
Tue April 17, 2012

If You Hate Tax Day, Just Wait Until Next Year

Originally published on Tue April 17, 2012 5:56 pm

More than 99 million federal taxpayers had filed their returns as of Tuesday, with more than 80 million of those expecting a refund.

People who file at the last minute — and Tuesday is this year's deadline — are somewhat more likely to owe money to the government. And if Congress and the president don't act, next year could see many more Americans paying higher taxes.

That's not because either President Obama or presumptive Republican challenger Mitt Romney advocate a tax increase for most Americans.

Last week in St. Louis, Romney received applause when he declared: "Instead of raising taxes, I'm going to cut 'em."

Obama is almost as tax averse, limiting his call for tax hikes to the wealthiest 2 percent of Americans. He has called for tax hikes only for those making $250,000 a year or more.

A Bush-Era Tradition

And yet, the way the tax law is now written, 2012 could mark the end of more than a decade of rock-bottom taxes.

"Potentially, we could see the biggest tax increase in modern history" in 2013, says Bob Williams of the nonpartisan Tax Policy Center.

The tax cuts championed by President George W. Bush a decade ago, and extended in 2010, are due to expire at year's end. That would mean higher taxes at every level of income, as well as higher taxes on dividends, inheritance and capital gains.

"The biggest hits would be on the very wealthy," says Williams. "Those are the people who've benefited most from the Bush-era tax cuts. But people at the very bottom would be hit as well."

All of this will happen automatically unless Congress and the president act in concert to prevent it.

"It's the do-nothing option," says Williams. "If Congress does nothing, taxes go up automatically."

Not everyone is alarmed by that.

New York Mayor Michael Bloomberg told CBS last month that taxes have to go up for everyone in order to put a dent in the federal budget.

"Most of this country is middle class. And that's where most of the tax revenue is. So if you want to raise $4 trillion over the next 10 years, which gets you halfway — only halfway — to a balanced budget, everybody's taxes have to go up," said Bloomberg.

Action, Or 'Benign Neglect'?

Economist Diane Lim Rogers of the deficit-watchdog Concord Coalition agrees that stemming the tide of red ink will require more tax revenue. But she sees some problems with letting the Bush-era tax cuts expire all at once.

"It wouldn't be the worst thing that could happen," says Rogers. "I think economists would prefer that instead of things happening out of benign neglect, that better things could happen out of good policymaking."

And Federal Reserve Chairman Ben Bernanke warns that a sudden, automatic increase in tax rates across the board next year could weaken a still fragile economy.

Rogers says a better approach would be to gradually close some of the special loopholes and deductions in the tax code that cost the government more than $1 trillion a year.

"The federal government spends a lot of money on benefit programs for the rich," says Rogers. "It just spends that money through the tax system rather than on the direct spending side of the budget."

But any big rewrite of the tax code is politically challenging.

Hopes for a grand budget bargain fell apart last year when Obama pressed for more tax revenue, and Republicans refused. If Obama wins re-election in November, Bloomberg thinks the threat of automatic tax hikes will give him more negotiating leverage with Congress.

"All the president has to do is say, 'I am going to veto any bill that tries to stop the automatic ending of the Bush-era tax cuts for everybody,' " explains Bloomberg. "And then everybody's taxes will go up."

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