Taxmageddon coming? Answer could cost Americans $500 billion

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'Taxmageddon' on the horizon?

Analysts warn about future tax hikes

As many Americans were scrambling to get this year's taxes done, analysts were warning about a bigger tax day -- what some call a tax Armageddon, or "Taxmageddon," to characterize its potential effect on the U.S. economy.

At the end of the year, some $500 billion in tax breaks expire all at once, hitting American households with an average tax increase of $3,800 -- if Congress doesn't act.

The potential increases include $165 billion more from taxpayers as a result of expiration of the Bush-era tax cuts, which would push taxes from a bottom rate of 10 percent and a top rate of 35 percent to a bottom rate of 15 percent and a top rate of 39.6 percent.

"Taxmageddon is a $500 billion, one-year tax hike that hits the economy on Jan. 1, 2013," Curtis Dubay of the Heritage Foundation said.

It would cut the child tax credit by half, from $1,000 a child to $500.

The marriage penalty would return.

The tax on dividends, which many seniors rely on, would soar from 15 percent to as high as 39.6 percent.

A separate $124 billion cut in the payroll tax would end.

And a temporary fix to the alternative minimum tax would be erased. The tax originally was aimed at millionaires, but it could would hit some 34 million taxpayers next year.

"Almost the entire tax code has been put on a year-to-year lease, and in some cases, month-to-month lease, which is no way to run a tax system," Scott Hodge of the Tax Foundation said.

The expiring cuts would hit all income groups but those at low and middle incomes the hardest.

"Taxmageddon falls 70 percent on middle and low income families. That's because 60 percent of the Bush tax cuts were for middle- and low-income taxpayers," Dubay said. The payroll tax cut was aimed at the same taxpayers.

"No American will be unscathed at the end of this year," Hodge said. "Taxmageddon hits all of us."

And that could have a serious impact on the economy, including a drop in disposable income for individuals, which would put a damper on the overall economy.

Jim Capretta, a former official with the White House's Office of Management and Budget who now works for the Ethics and Public Policy Center, says it would mean "an economy that's about one to two percentage points points smaller than it otherwise would have been, and unemployment that's a full percentage point higher than it otherwise would have been."

With all that facing the economy, wouldn't Congress act? Ordinarily, yes -- but this is a presidential election year.

"It's my guess that nothing will happen on any of these issues until after the election," Hodge said. "Here we have a case where many in Congress will be retiring, maybe even a president. How do you fix system with that uncertainty?"

And Capretta adds, "it'd be hard for an old ... outgoing Congress to make decisions when a new Congress is about to come in. And I think the public might react a little badly to that as well."

Nevertheless, one congressional source says the chances of a lame duck session are 100 percent: Congress can't afford to take the end of the year off.

All this raises the stakes for the economy, because until Congress acts, businesses can't know what their tax rates are going to be, making it hard to hire more workers or plan for the future and leaving both taxpayers and the economy awash in uncertainty.