Republicans in Congress have ruled out tax increases as part of any negotiation on attacking budget deficits that are forecast to hit $1.4 trillion this year alone.
Their mantra is "We don't have a revenue problem, we have a spending problem." In other words, slash spending, don't raise taxes.
Democrats counter that the federal budget cannot be balanced on the backs of the poor and middle class through steep cuts in federal spending on healthcare, education, nutrition and other programs. In other words, raise taxes on the rich.
David Kendall, senior fellow with the centrist think tank Third Way, sees it differently: "We have a revenue problem. We have a spending problem."
Spending has dominated the debate so far. Fueled by economic stimulus, federal outlays have grown massively, hitting $3.5 trillion last year, or nearly 24 percent of gross domestic product -- the highest share in around 60 years.
Some spending cuts came in April, and Congress and President Barack Obama are locked in contentious talks about deeper reductions and other ways to shrink the deficit.
Following is an overview of the U.S. tax landscape:
The Treasury is expected to collect about $2.2 trillion in revenues in the 2011 fiscal year ending September 30, equal to about 14.8 percent of GDP, according to government statistics.
That would put U.S. revenues as a share of the economy at their lowest since 1950. For decades, revenues had been running in the range of around 17-20 percent of GDP. Bush-era tax cuts and the Great Recession have contributed to the dip.
Of the 34 mainly rich countries in the Organization for Economic Cooperation and Development, the United States has the third-lowest "tax burden," trailing only Mexico and Chile, according to OECD. On the other end of the spectrum, Sweden and Denmark rank as having the highest ratio of tax revenues as a share of GDP, around double the U.S.
Among ideas for increasing revenues to help shrink U.S. budget deficits: Raise taxes on the rich and tighten an array of tax loopholes; kill or curtail some tax breaks, including billions of dollars worth for profit-rich major oil companies; start taxing healthcare benefits companies give their workers, which many Republicans would support; end or limit mortgage interest deductions; encourage corporations to repatriate profits they're holding abroad.
Both Republicans and Democrats say they want to look at reducing the 35 percent top tax rate on companies -- among the highest in the world -- to encourage them to expand and create more U.S. jobs. There's a push to cut the rate to 25 percent or lower, while eliminating certain tax breaks.
One difference between the United States and some of its competitors with lower tax rates: Nearly all of them have a value-added tax, a kind of national sales tax, which raises huge sums. U.S. politicians from both parties have rejected a VAT-type tax.
Many companies reduce the taxes they pay to well below the 35 percent rate through credits and deductions scattered throughout the tax code. Others, such as retail giants like Wal-Mart and health insurers with few foreign operations or capital investments, get less benefit from such tax breaks.
So any reform effort is sure to bring on spirited lobbying, pitting some companies against others.
Corporate tax revenues, which totaled only $191 billion last year, were about 1.3 percent of GDP. Contrast that to the $899 billion in revenues from individuals, or 6.2 percent of
Republicans in the House of Representatives also want to stop taxing U.S. companies on income earned abroad, saying it will help make them more competitive. Some fear this could worsen, not help fix, the U.S. budget deficit situation.
WHO DOESN'T PAY TAXES?
Republicans such as Senator Jon Kyl have said lower-income people need to have "more skin in the game." They are alluding to people who pay no income taxes in some years because of their low incomes.
The left-leaning Center for Budget and Policy Priorities has analyzed a congressional finding that 51 percent of households owed no federal income taxes in 2009. CBPP says that number was inflated by the severe economic recession that was raging in 2009 and that the figure is more typically in the range of 35 percent to 40 percent -- mostly the poor, unemployed, disabled, elderly and students.
The group also points out that even though their low incomes may have gotten them off the hook for paying income taxes, they do pay their share of Social Security and other payroll taxes (if they have jobs) and excise taxes, such as the gasoline tax.
CBPP also cited a U.S. Government Accountability Office study that found that every year between 1998-2005, about 55 percent of large corporations paid no corporate income taxes. But just like lower-income individuals who temporarily hit rough spots, the GAO found that most companies promptly resume tax payments. Only 2.7 percent of the big corporations had no net tax liability in all eight of the years reviewed.
Citizens for Tax Justice has a new study that looked at the tax-paying habits of a dozen major U.S. corporations. It found that the companies overall had a negative 1.5 percent tax rate on $171 billion in profits during 2008-2010.
Senate Budget Committee Chairman Kent Conrad cites a 2007 Senate probe concluding that offshore tax evasion costs the Treasury about $100 billion a year -- $40 billion to $70 billion from individuals and $30 billion from corporations.
(Reporting by Richard Cowan)