Is America headed for its biggest tax hike since World War II?
The answer, nonpartisan fiscal watchdogs say, is yes -- but with a big "if" and a few caveats.
If Congress returns after the Nov. 2 midterm elections and does nothing, allowing the Bush tax cuts to expire, then New Year's Day will usher in the nation's biggest tax increase since the end of World War II, according to Bill Ahern, spokesman for the Tax Foundation, a nonpartisan tax monitoring group.
“If nothing happens in Congress -- and that is a possibility -- and all the tax cuts are allowed to expire, the median American family will see a smaller paycheck and a tax increase of $1,540 on January 1,” Ahern said.
And that could be just a start.
“If there is total gridlock, then there will be additional tax breaks that will expire not connected to the Bush cuts,” he said, noting that if this happens, then Americans' taxes would grow higher. Among those are the “patch” to the Alternative Minimum Tax (AMT), the estate tax and a host of temporary tax cuts the Obama administration implemented as part of the stimulus package.
“Not patching the AMT would cost an additional $70 billion” to taxpayers, Ahern said.
Joseph Thorndike, an independent historian who is working on a history of American taxation, agrees. He said legislative gridlock would probably spark the largest tax increase since the 1940s.
“This will represent 2 percent of GDP, and the only comparable one since the war would be the Reagan tax hikes, which amounted to 1.6 percent of GDP,” he said.
The problem -- or the solution, experts say -- is that neither the Democrats nor the Republicans in Congress want all the Bush tax cuts to expire. The Obama administration wants to renew all the cuts except those for individuals who make more than $200,000, or families that make more than $250,000 annually. That would mean a tax increase of $7 billion -- but it wouldn't be one for the record books.
And Republicans, who are in the minority in both the Senate and the House, want to extend the tax cuts across the board. So while the political gap is a bitter one, most analysts feel it isn't too wide to be closed.
Thorndyke also warns that if you consider an expiring temporary tax cut to be a tax increase, it “means that there will be no more temporary tax cuts. All tax cuts will be permanent, and I don’t think even Republicans want that."
"It would just be shortsighted and eliminate an important economic tool.”
Gerald Prante, also of the Tax Foundation, took it a step further. “Saying President Obama is pressing for the largest tax increase in history is highly misleading,” he said.
“There are only two real options,” said Larry Sabato of the University of Virginia’s Center for Politics. “Extend the cuts for everyone, or allow the tax cut to expire for those making more than $200,000.” And if either of those comes to pass, then a tax increase won't be the worst since World War II.
Experts say that even if the worst happened and all the tax breaks expired, the arbiter of tax history -- Jerry Tempalski, an economist at the Treasury Department whose work has been the basis of all the historical tax claims -- wouldn’t recognize it as a record. That, they said, is because it technically wouldn't be a tax increase -- the result of a direct congressional action. It would simply be the expiration of an existing program, they said. The Treasury Department declined a request for an interview with Tempalski.
Steve Ellis, of Taxpayers for Common Sense, says that the battle over whether it would be the largest tax hike in history obscures the real issues.
“Debating it in the aggregate doesn’t accomplish much,” he said. "The real debate should be over whether all the pieces make fiscal sense.”
Correction: Tax Foundation spokesman Bill Ahern was misidentified in an earlier version of this article.
Check out Wednesday's story on FoxNews.com about what happened to Obama's campaign promise not to raise taxes.