At the center of the fall campaigns, from the presidential race on down, is whether to extend all or some of President George W. Bush's temporary tax cuts which are set to expire at the end of the year.
President Barack Obama wants the Bush-tax cuts to expire for people making over $250,000 a year as a way to help rein in a nearly $1.2 trillion federal budget deficit and more than $16 trillion national debt. The president has said the "wealthiest Americans" need to pay their "fair share" in helping to deal with the deficit crisis, which includes steering the country away from driving over the fiscal cliff of the looming sequestration cuts.
A July study by accounting firm Ernst & Young points out, however, that increasing tax rates for higher income earners would affect more than just individual households, as many small-business owners file their taxes using the individual taxpayer rate. The Congressional Joint Taxation Committee estimates that 53 percent of net positive business income is taxed this way.
Republican presidential nominee Mitt Romney wants to extend the Bush tax cuts for all income levels, provide additional tax cuts, and reduce the corporate tax rate. Romney has said he wants to "bring tax rates down for everyone" while keeping any tax cuts revenue neutral, meaning despite lower tax rates overall, the federal government would still bring in the same amount of money.
An August study by the Brookings Institution/Urban Institute joint Tax Policy Center said it would be difficult under Romney's plan to keep his tax cuts revenue neutral without shifting the tax burden to middle- and lower-income earners by reducing or eliminating tax exemptions and deductions.
No easy way out
Quentin Kidd, director of the Wason Center for Public Policy at Christopher Newport University, said both Republicans and Democrats realize the need to deal with the structural deficit but there is "no easy way out" of the problem.
Simply put, a structural deficit develops when spending outpaces revenue. The federal government now spends 23 percent to 24 percent of the Gross Domestic Product, which measures the value of all goods and services produced in the country.
Current revenue is roughly 17 percent of GDP.
To make up the difference, the federal government borrows roughly 40 cents on every dollar it spends. That has led to the rapidly growing national debt, which most economists agree is unsustainable in the long run.
Jesse Richman, professor of political science at Old Dominion University, said the deficit can be overcome by the cuts-only approach favored by most Republican lawmakers and candidates, most of whom have signed political activist Grover Norquist's "no-new-tax pledge."
Richman said to make up the gap, the cuts must be large and deep and must affect many key, popular government programs. But, he said, it's not clear that either large cuts or significant tax increases are "politically palatable."
Kidd said Americans are looking at economic pain going forward regardless of which side's policy argument wins out, or even if a compromise is reached. The question, he said, is who will carry the largest burden.
Richman and Kidd said the studies by Brookings and Ernst and Young are both legitimate. The difference between them is which issues they focus on. The Brookings Institution, a center-left think tank, bolsters Democratic arguments against Republican policy goals. Ernst and Young, which Kidd describes as "chamber of commerce conservative," favors Republican arguments against Democratic policy plans.
"Both are saying legitimate, real things," Kidd said. "They're not cooking the numbers."
The Brookings' study looked at Romney's plan to extend all Bush-era tax cuts, reduce tax rates by 20 percent, repeal the alternative minimum tax, eliminate the estate tax and end taxing of investment income earned by most taxpayers, while keeping the tax code revenue neutral.
Romney has proposed eliminating certain tax preferences and exemptions to compensate for the cuts. He has not detailed which preferences and exemptions he would target.
To achieve that balance, the Brookings study says, Romney would have to severely reduce or eliminate some of the biggest and most popular tax exemptions, such as the mortgage interest deduction, the deduction for charitable contributions, the earned income tax credit and the child tax credit.