U.S. taxes to rise -- but when, how much?

08:34, April 19, 2010      

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Another April 15 -- national tax day in the United States -- has come and gone. Many Americans fret taxes are due to rise. But the question is when and how much? And will the amount be enough to take a significant chunk out of their wallets?

The federal government is spending at highs not seen in decades, and while Republicans call it wasteful, Democrats argue that spending on such bills as the 87 billion-U.S. dollar stimulus package has been necessary to keep the economy from tanking.

Still, the deficit is ballooning to record highs, with the interest alone expected to equal the size of the U.S. economy in the next decade. And that has many Americans expecting a tax hike.

Indeed, a Gallup poll released Wednesday found 63 percent of Americans believe their taxes will rise in the next 12 months.

Seventy-four percent of Republicans and 64 percent of independents expect their taxes to increase. A significantly lower amount of Democrats -- 49 percent -- agree with that view. Forty-one percent of Democrats said they believe their taxes will remain the same, and 6 percent think theirs will decrease, the study said.

Some experts say while the poll suggests expectations of future taxation could be in part connected to people's political views, there are good reasons for concern.

Senators Lindsey Graham (Republican-South Carolina), John Kerry(Democrat-Massachusetts) and Joe Lieberman (independent-Connecticut) are considering the implementation of a new gas tax, and the amount being batted around is 15 cents per gallon (3.96 cents per liter).

And in 2011 the tax cuts instituted by former President George W. Bush are expected to expire, and new taxes from President Barack Obama's health care bill are due to kick in and impact higher earners.

There are also some murmurings of a possible implementation of a value added tax (VAT) -- a type of sales tax -- such as the ones that exist in many European Union nations.

White House advisor Paul Volcker alluded to the idea at a recent panel discussion in response to a question from CBS MoneyWatch.com when he said, "We have to think about really revamping the tax system," and that a VAT was not a "toxic idea."

Dean Baker, co-director at the Center for Economic and Policy Research think tank, said the government will have to tackle the deficit at some point, but "they would be crazy to do anything soon. To talk about a tax increase before 2013 is kind of nutty," as the economy is projected to be weak for the next few years.

J.D. Foster, senior fellow at the Heritage Foundation think tank, said a VAT would be devastating to the middle class. Other economists stopped short of describing the impact in such terms, but said a VAT would take money out of people's pockets and push down living standards.

Foster said there is no reason to assume the middle class will be safe from tax hikes, and that increases Obama has proposed will harm the economy. The consequences will hit upper-income earners and filter down in the form of lower wages and fewer jobs over time, he said.

Some are calling for tax reform, citing arguments that the system is too complicated and unfair, as a number of low-income Americans pay virtually no taxes and those at the top are said to pay too little.

There are also concerns that U.S. corporate taxes, which rank among the world's highest, impede economic growth.

Senators Ron Wyden (Democrat-Oregon) and Judd Gregg (Republican-New Hampshire) have proposed a much-talked-about idea to simplify the nation's tax code and reduce corporate tax rates.

The last time when tax reform was undertaken was during the presidency of Ronald Reagan in a 1986 overhaul that closed many loopholes, simplified the system and brought the top tax bracket down from 50 percent to 28 percent.

But since then, rates have crept back up to 35 percent for the top echelon of tax payers and new exclusions and subsidies have appeared. Once the Bush tax cuts expire at the end of the year, the top tax rate will return to nearly 40 percent.

"What it is going to take to get back to that type of system ... is another grand political deal and we just don't have a way of getting to that in the Congress right now," William G. Gale, a tax policy expert at the Brookings Institution, said in a Web cast on the organization's website.

"The political environment is just such that neither side is willing to compromise," he said.



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