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Extra2/3/2010 3:50 PM ET

Get ready to pay more taxes

With funding cuts to national defense and major entitlements politically unpalatable, the middle class inevitably will be asked to do more to help close the budget gap.

[Related content: taxes, budgeting, Medicare, spending, income tax]
By U.S. News & World Report

If you're hoping that tax hikes on the rich will solve America's debt crisis, you're overestimating the power of the wealthy.

President Barack Obama's budget proposal would raise taxes on upper-income earners by $969 billion over the next 10 years, yet the federal debt would continue to explode. To boost government revenues further, he'd raise an additional $122 billion from multinationals, $90 billion from banks, $37 billion from oil companies and $24 billion from hedge funds and private-equity companies.

All told, that's more than $1.2 trillion. And it would barely make a dent. We'd still have huge deficits, and the national debt would keep growing.

Taxing the rich will be one of the hot political stories this year. It will also divert attention from a much bigger story: Sooner or later, almost everybody in America is going to pay more in taxes.

One reason is that spending on Social Security, Medicare and Medicaid -- which accounts for 56% of all federal outflows -- continues to skyrocket, and cutting those programs, just as baby boomers begin to retire, would be politically perilous.

Few politicians in Washington want to cut defense, which leaves little else on the chopping block.

At least 35 states face their own budget shortfalls this year, with revenue in many states coming in below projections that were weak to start with, according to the National Conference of State Legislatures. When federal stimulus spending winds down in 2011, many states anticipate a "cliff effect," in which their revenues will plunge.

That means new revenue will have to come from somewhere -- and there aren't enough rich people to provide all the funds.

"It's inevitable that the government will have to find a way to have a truly middle-income tax increase," says Clint Stretch of consulting firm Deloitte Tax. "The trick is: how?"

Politicians, of course, don't want to admit that most of their constituents face a stinging tax hike. And until there's no other choice, they'll try to raise funds without having to mouth the "T" word. As federal, state and local governments get desperate, here are some of the mechanisms elected officials will try to use to raise funds without getting run out of office:

Expansion of existing taxes. Raising income tax rates is so unpopular that most politicians consider it a last resort. Raising state and local sales taxes is a bit more tolerable, and it's even better if you're simply expanding a tax that already exists.

"In many states, the first thing they'll do is squeeze more out of the taxes they've got," says Alex Meleney of Deloitte Tax. Some states, for example, could expand sales taxes to things not already covered, such as restaurant meals, salons, business services, Internet connections and phone or cable TV service.

It also makes sense to crack down on those evading existing taxes, by increasing the fines for late payments and underpayments and conducting more inspections to catch merchants and others who may be skirting their obligations.

"Avoidable" taxes. A new levy is more palatable when politicians can make the case that you don't have to pay it if you choose not to. Consumers might be able to offset new gasoline taxes, for instance, by driving less or buying a more efficient car.

Some states are mulling new energy or carbon taxes, with part of the pitch being that you can make up the difference by using less energy.

Then there are the classic "sin taxes" on cigarettes and booze, which are only for people with unhealthy habits -- and have already gone up in more than a dozen states, according to the NCSL. One new "sin" that could end up taxed: junk food.

Continued: The holy grail of revenue raisers

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