Tough tax questions face the next president

When both presidential campaigns talk about tax policy, it is not surprising they focus on tax cuts.

With April 15 just around the corner, nothing sounds better than a plan to slice the size of the check taxpayers must write to Uncle Sam.

The appeal of that theme is on full display on the campaign trail, but fiscal experts say it's also increasingly clear that the next president will face significant tax-code challenges that could result in voters paying higher taxes or facing a more aggressive Internal Revenue Service presence in their lives.

Outlining his economic policies, Senator Kerry told an audience at Georgetown University last week that under his plan "99 percent of American businesses and 98 percent of Americans will get a tax cut." Kerry did call for higher, Clinton-era tax rates for those making over $200,000.

Meanwhile, President Bush staged his own economic forum at South Arkansas Community College. A key part of his message: "Everybody who pays taxes ought to get relief if we're going to have relief."

But promises of tax cuts tell only part of the story. Experts say the next president will face a number of challenging tax policy questions. The issues in question are seldom included in campaign rhetoric, since they involve tough choices, including:

• Inadequate revenue. "Whoever is president will continue to face huge budget deficits. "They cannot solve those by capping spending," says Charles Davenport, senior contributing editor at Tax Analysts, a nonpartisan publisher. The war in Iraq adds to the problem. On NBC's "Meet the Press" last Sunday, Senator John McCain of Arizona said, "we are going have to ask for more money after the election, and it's going to increase the ... deficit."

• An explosion in the number of middle-income taxpayers paying the Alternative Minimum Tax. The tax was adopted in the late 1960s to make sure the wealthiest Americans paid at least some taxes. "It now affects substantial numbers of middle-income taxpayers and will, absent a change of law, affect more than 30 million taxpayers by 2010," writes IRS taxpayer advocate Nina Olson in her annual report to Congress. The cost of fixing the problem: upwards of $450 billion over the next 10 years, according to figures from the Urban-Brookings Tax Policy Center.

• A sizable gap between what the government is owed and what it collects. "The tax gap is more than $300 billion in revenue we think we should be collecting and are not," says Peter Orszag of the Urban-Brookings Tax Policy Center. "Some of that is nonreporting [of income], some of it is aggressive use of tax sheltering."

• A major erosion in corporate tax revenue. Congress's General Accounting Office recently reported that 61 percent of US-owned companies and 71 percent of foreign-owned firms paid no taxes in the US from 1996 to 2000, when profits were booming. Last year, corporate taxes fell to just 7.4 percent of government receipts, versus 20.3 percent 40 years ago.

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