The Bush tax cuts are scheduled to expire at the end of the year. Barack Obama has repeatedly said he wants to extend the cuts for 98 percent of households, or those making less than $250,000. If he gets his wish, that's just the beginning of the story.
The White House is considering "limiting an extension of the popular middle-class tax cuts to a year or two," according to the New York Times. Why? First, they want to shrink the deficit projections. Second, Democrats expect to overhaul the tax code before 2012.
Both parties know that a showdown over tax law is brewing, and Washington lobbyists can smell the brew. In the short term, the battleground will be the Bush tax cuts. Republicans will argue that you can't roll back tax cuts (that is, raise taxes) on upper-middle class earners during a slow recovery. Democrats will argue that we're a safe distance from the recession, the federal coffers are starving for more revenue, and returning the top marginal rates to their 2000 levels to capture $678 billion of revenue until 2020 is a justifiable corrective at a time when the top five percent of earners take home the highest share of total income in more than five decades.
Act One will be tax cut rollback. Act Two will be tax reform. What will that look like? Many experts expect a value-added tax might appear to help offset reductions in income, payroll or corporate taxes. Others expect broad, tax-neutral reform along the lines of the Wyden-Gregg tax simplification plan (read about some of its features here). The theme coming out of sensible liberal and conservative corners is that we should broaden the base of taxable income in exchange for lower tax rates. But what does that even mean? Let's consider some examples.