WHY IT MATTERS:

Taxes

[September 19, 2012]  WASHINGTON (AP) -- The issue:

Just about every U.S. taxpayer is facing a significant tax increase next year, unless Congress and the White House can agree on a plan to extend a huge collection of tax cuts that expires at the end of the year. Beyond that, there's a huge debate over how to overhaul the tax code to make it simpler, with lower rates balanced with fewer deductions. Can homeowners hang onto their juicy mortgage interest deduction? If it's taken away, can lawmakers hang onto their jobs?

Where they stand:

President Barack Obama wants to extend Bush-era tax cuts again, but only for individuals making less than $200,000 and married couples making less than $250,000. Those making more would see their taxes go up, though they would still pay less than when Bill Clinton was president. Obama also wants a new rule requiring people who make more than $1 million a year to pay at least 30 percent of their income in federal taxes.

Republican presidential candidate Mitt Romney wants to extend all of the Bush-era tax cuts and enact some new ones. Romney proposes dropping all income tax rates by 20 percent, reducing the top tax rate from 35 percent to 28 percent. The bottom rate would go from 10 percent to 8 percent. Romney says he would pay for the rate cuts by eliminating or reducing tax credits, deductions and exemptions, but won't say which ones would go.

Why it matters:

If Congress can't agree on a plan to extend the Bush-era tax cuts, income tax rates would go up for people at every income level. Estate taxes and investment taxes would increase and the alternative minimum tax would hit millions of middle-income people. A payroll tax cut that has saved workers an average of about $1,000 a year in 2011 and 2012 would expire. Dozens of business tax breaks would go away.

In all, taxes would go up by more than $400 billion next year. Combined with federal spending cuts scheduled to take effect in 2013, the one-two punch would probably send the U.S. economy back into recession, according to government economists.

But the fight over Bush-era tax cuts is just the appetizer for a much bigger debate about overhauling the entire tax code.

At 3.8 million words, the U.S. tax code is so thick and so complicated that the head of the Internal Revenue Service says he has to hire someone to do his taxes. Momentum is growing in Congress to make it simpler and fairer. But it's a monumental task that won't get done without leadership from the White House.

Most lawmakers agree that the tax code is filled with too many credits, deductions and exemptions, creating too many winners and losers. Most also agree on a general formula for tax reform: Lower overall tax rates and pay for the reductions by eliminating or reducing some of those credits, deductions and exemptions.

There is, however, no consensus on the details. Why? Because every tax break -- every layer of complexity -- is important to somebody. In some cases, millions of somebodies.

Thirty-four million homeowners claim the mortgage interest deduction and 37 million filers claim the child tax credit. Good luck finding the votes in Congress to cut those tax breaks.

In 1986, President Ronald Reagan worked across party lines with Democrats in Congress to overhaul the nation's tax laws, lowering the rates and simplifying the code.

That same type of cooperation -- and trust -- is essential to overhauling the tax code again. It is, however, almost nonexistent in today's Washington.

[Associated Press; By STEPHEN OHLEMACHER]

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