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What's Next for Taxes?

As you file your tax forms this year, odds are that you're not thinking, "Wow, I've really got it made!" While writing checks to the IRS or trying to figure out why the "gross" number on your paycheck is so much bigger than the amount deposited in your account, you're probably not savoring the moment, reflecting on how little you actually have to pony up to Uncle Sam. Maybe you should be. You're still enjoying the fruits of the 2001 and 2003 tax cuts. In fact, the actual taxes paid by Americans, as a percentage of adjusted gross incomes, dropped from 15.3 percent in 2000 to 12.7 percent in 2007.

Enjoy it while you can. With government spending projected to outpace revenues by $9 trillion over the next decade, today's low tax rates can't last, even if Congress were to find the will to cut spending. Just to eliminate this year's budget deficit, tax rates would have to be 24 to 85 percent, not today's 10 to 35 percent, according to the Tax Foundation, a Washington, D.C.-based think tank.

Meanwhile, spending keeps marching along. Assuming no changes to tax rates, by 2020 roughly 93 cents of every dollar of federal revenue will be eaten up by major entitlement programs such as Social Security and Medicare, and payments on the national debt.

No one in Washington disputes that tax policy is in need of an overhaul, but most agree that the timing is off for sweeping reform this year. "I don't think Congress has the stomach for it, after what it has gone through on health care reform," says Howard Gleckman, research associate at the Tax Policy Center and editor of the TaxVox blog.

Still, Congress can't sit on its hands in 2010 because the Bush-era tax cuts are expiring. Do nothing, and next year a slew of tax rates will revert to 2000 levels — and that would mean higher taxes, including the return of the estate tax. So federal legislators will likely tackle a handful of key tax laws, and those changes could mean higher taxes soon. Longer term, expect bigger changes, such as a possible value added tax, or VAT. Read on for our complete guide to what's ahead for taxes in the short term — and learn why even more change could be in store beyond that.

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