04/02/2012 01:21 pm ET | Updated Jun 02, 2012

A Time Bomb of a Tax Code

There's a lot of serious news out there -- tragedy, health care, a nuclear Iran. It seems the news of the day roars at us.

But if you turn down the sound, you can hear it: tick, tick, tick. What is it, you say? It's the federal tax system, and it's set to explode. And if it does, there will be damage.

If Congress and the president do nothing about our tax system between now and the end of the year, here are just a few things in the tax law that will blow up. (From a Joint Committee on Taxation Report, JCX-1-12.)

All of the so-called Bush individual income tax cuts go away. Not just the rates on the rich, but all of them. For people in the 10 percent marginal income tax bracket, your bracket is busted (sorry for the March pun). If your maximum rate was 25 percent, it's now 28; if it was 28, it's now 31; if it was 33, it's now 36; and if it was 35, it's now 39.6.

  • The tax on capital gains goes up. And the special break for dividends goes away.
  • The payroll tax goes up -- for everyone.
  • Child credits are cut.
  • You will get a tax increase for being married.

The estate and gift tax rules return to where they were in 2001. For example, the exemption amount goes from $5 million to $1 million and the top tax rate goes from 35% to 55%. How anyone can do estate planning these days is beyond me, and I get asked that question by tax practitioners a lot.

Already gone is protection from the effects of the Alternative Minimum Tax for millions of taxpayers. Left that way, millions of middle-class taxpayers will see their 2012 income taxes go up by thousands of dollars.

And, as I said, these are just a few of the many tax rules we have all become used to that are set to expire if Congress and the president do nothing. And, it's an election year -- an environment in which they specialize in doing nothing, or as little as possible.

Think of how taxpayers will react when they get their New Year's surprise: a huge tax increase. What will happen to the stock market when thousands of investors cash in to avoid paying increased taxes on investments they made? Did you hear a crash? And what happens to the economy when this kind of massive tax change happens because nobody did anything to stop it? Harvard economics professor Martin Feldstein says it will "push the US into a new and deep recession next year."

A friend of mine, who is a great tax policy expert, says we ought to let it happen -- and I think he is only half kidding. Because it's going to take a shock like I just described to get our lawmakers to face up to the mess of a tax system we have.

Has it come to that?

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