Tax day 101: How is the tax code changing under Obama?

What Obama might do next

The budget gap is poised to remain so wide, many tax experts say, that both spending cuts and tax hikes will be needed. More taxes on just the "rich" are unlikely to do the trick.

"We are going to be desperately seeking revenue," predicts Rosanne Altshuler of the Tax Policy Center in Washington, which does nonpartisan research on tax policy.

In a recent analysis, she and colleague Roberton Williams tested several ways to reach Obama's goal of bringing the budget deficit down to 3 percent of gross domestic product by 2015. To do it just by raising income taxes on those earning more than $250,000, the tax rates on those top earners would have to rise to 77 percent of income.

"The rates would be so high as to make collecting the taxes impossible," Ms. Altshuler says.

However, a dramatic break with campaign pledges could be politically damaging to Obama or any politician.

More like Europe?

One possibility is that, if Obama calls for ramped-up federal revenue after congressional elections this year, his plan won't involve big hikes in middle-class income taxes. One option under review is a new value-added tax (VAT), similar to a national sales tax.

Many European nations have such a tax. Both fans and foes of the VAT say it's not surprising that as the US edges more toward Europe in its health-care entitlements, it will ponder tax-code parallels as well.

"My own guess is that the United States will likely raise taxes substantially, and taxes as a percent of GDP will reach levels never seen in U.S. history (although common in Europe)," Harvard University's Gregory Mankiw, who served as Mr. Bush's top economist, wrote in a recent online posting.

Health-care controversy

As for health care, Obama's legislation includes a range of taxes that are intended to keep the reforms from adding to federal deficits: higher capital-gains and Medicare taxes on the rich, a tax on high-end insurance coverage offered by employers, and levies on the health-care industry, including drug and medical-device manufacturers.

The health-care law also includes penalties on businesses (except very small ones) that don't offer health plans for their employees, as well as on individuals who don't have health insurance.

Critics say some of the health reform provisions amount to backdoor taxes on middle-class Americans. The White House argues that, overall, the reform package will reduce health-care costs for millions of families without adding directly to their tax burden.

Also in Tax Day 101:

Part 1: Top mistakes to avoid on your tax return

Part 2: Who pays no income taxes on April 15?

Part 3: How to file a tax extension form to the IRS

Part 4: How is the tax code changing under Obama?

Part 5: Are some states driving people out with high state taxes?

Part 6: How some millionaires can owe no taxes

Part 7: The tax code needs a fix – but exactly how?

Part 8: 42 excuses you can't use to avoid filing IRS forms

Part 9: OK, now it's time to plan for next April 15

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