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April 08 The Next President's Tax Deadline

It’s April, an easy time for every presidential candidate to grandstand on the subject of taxes. The next president won’t have that luxury.

From 14 words in the Constitution—“Congress shall have the power to lay and collect taxes, duties, imposts and excises”—the U.S. tax code has grown into an unwieldy, inefficient behemoth that finances the federal government and traumatizes 133 million taxpayers annually. Form 1040 alone requires 92 pages of instructions and takes the average taxpayer 33.5 hours to complete.

It also has become a virtual toolbox for social change. The first tax break was created in 1913, when a spousal exemption was added to the law imposing an income tax. It saved the lucky couples up to $7.50.

Nearly a century later, the tax code has exploded—2.8 million words, 67,506 pages of regulations and rulings, a combination of exemptions, credits and deductions designed to encourage research, work, education, rural and city development and discourage drinking and smoking. One tax deduction gives business a $200 billion-plus break for providing employees with health benefits. There are deductions for charity and home mortgage payments. There are thousands more that together make the tax code, as presidential candidate Jimmy Carter railed a generation ago, “a disgrace to the human race.”

But for all of the tax code’s complexity, the next president faces options that are direct and unavoidable. The expiration in two years of more than $300 billion in tax cuts and an exploding budget deficit will force his or her hand. To let all the cuts expire will result in a huge tax hike. To extend them will create a gigantic hole in federal finances already reeling from a projected budget deficit of more than $500 billion and today’s almost $10 trillion national debt.

Consider the price tag in 2011 of three tax programs. First is the $174 billion package of individual and business tax cuts and expanded child and education credits. The cuts trimmed the tax bill for an average family of four from $4,000 to $2,300, but they expire in two years.

Second is the alternative minimum tax, an outdated, 40-year-old attempt to close loopholes exploited by a handful of millionaires. Today, because of inflation, that complicated alternate tax ensnares more than 25 million mostly unsuspecting middle-income taxpayers. A permanent fix will cost $81.1 billion.

Third is the famous “death tax.” In 2010, the estate tax will be fully repealed. But at midnight on Dec. 31, 2010, the zero percent tax rate expires. The next day, any inheritance over $1 million would be subject to a 55 percent tax. That would be a $50 billion swing in federal revenues and make for what former Sen. Paul Sarbanes of Maryland called “interesting family dynamics.”

For the next president, it is also an unavoidable wake-up call. The reality is that among these three initiatives, some $300 billion is at stake in the year 2011 alone. That would finance two years of the Iraq war, more than half of all Social Security payments, 75 percent of Medicare payments, or more than the combined spending of nine of the 15 Cabinet-level departments.

At the same time, the next president will face an exploding budget deficit in desperate need of revenue and an ongoing need for fairness. There are options, but postponing a decision is not one of them.

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