Tax Threats on Tax Day 2007

     Tax Day 2007 provides all Americans a reminder of the horrible burden placed on them by federal, state and local governments. According to the Tax Foundation, Americans will have to work until April 30 this year just to earn the money they’ll need to pay their taxes.

     But as bad as the tax bite is now, there are a number of threats at the federal level that could make things a whole lot worse for taxpayers.

     Of most immediate concern is the Alternative Minimum Tax (AMT). When it was created four decades ago, the AMT was aimed at fewer than 200 taxpayers. Because this alternative set of tax rules wasn’t indexed for inflation, an increasing number of taxpayers have been trampled by the AMT, meaning both added complexity and higher tax bills.

     In the absence of congressional action, more than 23 million taxpayers will be subject to the AMT this year. By 2017, that number will reach 39 million. Most analysts say that at best, Congress will apply a band-aid to the problem, with no permanent fix in sight.

     An even bigger threat to taxpayers is the possibility that President Bush’s tax cuts – which are scheduled to expire at the end of 2010 – might not be continued. They’re set to expire as it is, so Congress can just sit on their hands and allow a huge tax hike – by doing nothing.

     Many on Capitol Hill who are scheming for big government are itching to get rid of the president’s tax cuts so they can spend the money. In the House and Senate Budget Resolutions, congressional Democrats already have laid the groundwork for the end of the tax cuts.

     Those who support jettisoning the Bush tax cuts cite them as the cause of our current deficits. Nothing could be further from the truth. As the National Taxpayers Union and the Business & Media Institute have shown, media coverage of tax cuts perpetuates this idea and distorts the public’s view of the deficit.

     Numbers from the Office of Management & Budget (OMB) disprove claims that Bush’s tax cuts have starved the Treasury of needed revenue: adjusting for inflation, during the current fiscal year, Washington will collect 27 percent more money than just 10 years ago, which should be more than enough for the needed business of government.

     The congressional Budget Resolutions of this year are the opening salvo in a war that will be carried on over the next several years. At stake is whether Washington will foist upon taxpayers the biggest tax increase in American history.

     Finally, the largest threat facing taxpayers comes over the longer term in the form of the unfunded liabilities in Social Security and Medicare. Left unchanged, these programs have a gap between projected spending and revenues of $39 trillion over the next 75 years. If these programs aren’t reformed or spending slowed, the tax increases on future generations of workers will dwarf anything the nation has ever seen (including the pending tax increase if the Bush tax cuts are erased).

     President Bush took some steps in his budget this year to try to alleviate the shortfall in Social Security and Medicare. Overall, Bush outlined a plan to trim mandatory spending by $96 billion over five years. Most importantly, Bush proposed slowing Medicare spending by a variety of means, including trimming benefits going to wealthier Americans.

     Bush’s proposals would lower Medicare’s unfunded liabilities by $8 trillion, which is good progress on a very intractable problem. Unfortunately, the Bush ideas were tossed by congressional Democrats from their budget plans, so it appears that at least one more year will pass with no action by the federal government to fix this problem.

     While the threats are many, voters have emphatically expressed their view that they don’t want to pay higher taxes. Whatever the fortunes of the two major parties, during the last several elections, Americans have made quite clear in their votes on numerous state-level ballot measures that they reject higher taxes and want limits placed on government.

     As attention is turned to fixing the AMT, making the Bush tax cuts permanent, and reforming our entitlement programs, Washington politicians who ignore the will of the people on taxes will do so at their own peril.

John Berthoud, an adviser to the Business & Media Institute, is president of the 350,000-member National Taxpayers Union & the National Taxpayers Union Foundation (