News Column

What Could Happen to Taxes?

November 8, 2012

John Waggoner


You'll see some changes in the U.S. Tax Code during the second Obama administration, and they may come quickly if Congress allows the nation to fall off the "fiscal cliff."

Without action by Congress, tax cuts enacted during the George W. Bush administration will end, sending the top marginal rate to 39.6%.

The cliff also would bring:

A rollback of the "income triggers" for alternative minimum tax (AMT) to their 2000 levels. That means 30 million to 31 million people would be paying AMT, says Edward Karl, vice president of taxation at the American Institute of CPAs.

A rise in maximum capital gains taxes to 20% from 15%. Dividends, now taxed at a maximum 15%, would be taxed at ordinary income rates.

Cuts of $110 billion a year in federal spending, split between defense and discretionary spending, usually social welfare programs.

Expiration of the 2 percentage point reduction in payroll taxes.

Aside from the economic shock of higher taxes and lower government spending, the IRS might have to delay tax refunds, says Eric Solomon, former assistant director of tax policy at the U.S. Treasury and co-director of the national tax department at Ernst & Young. That's because a host of tax issues, especially the AMT, affect the 2012 tax year.

The people who must resolve the issues are the same people who held office before Tuesday: President Obama and a lame-duck Congress. Obama wants the Bush tax cuts to expire for high-income taxpayers.

"The president could say, 'No deal,' and let everything expire, or find a way to reach a compromise that allows an extension under certain conditions," Solomon says. But Speaker of the House John Boehner indicated Wednesday that there may be room for compromise. "What we can do is avert the cliff in a manner that serves as a down payment on -- and a catalyst for -- major solutions, enacted in 2013, that begin to solve the problem," Boehner said.

Should the president and Congress reach a deal for an extension, it may give both sides time to work together for an overhaul of the tax code -- something both sides say they are willing to consider. But revising the sprawling tax code is a vast undertaking that hasn't been done since 1986.

And the 1986 tax reform got rid of some of the more easily eliminated deductions, such as for interest on credit-card debt. Lawmakers who want to lower overall tax rates and eliminate deductions would have to eye popular deductions such as the one for mortgage interest.

Even higher taxes on upper-income taxpayers, which Obama wants, may be problematic. Republicans, many of whom oppose any tax increases, control the House, which ultimately controls the nation's purse strings.

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Source: Copyright USA TODAY 2012

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