October 27, 2007
By J.D. Foster, Ph.D.
He billed it as "The Mother of All Tax Reforms." And it's
certainly ambitious. But the long-awaited rewrite of federal tax
policy, unveiled yesterday by House Ways and Means Committee
Chairman Charlie Rangel, is going nowhere fast.
In fact, the Harlem Democrat's proposal has no chance of making
it into law this year or next.
Still, it's important: It shows where the chief Democratic tax
writer would take us in the next Congress, should there be a
sympathetic occupant in the Oval Office. And where he'd take taxes
is up - way up.
But the proposal isn't all bad. As with most attempts to wholly
recast tax policy, it's a mixed bag, containing some roses, some
thorns . . . and a large dose of manure.
Consider just one issue: Rangel's "fix" for the Alternative
Minimum Tax (AMT), a measure originally meant to ensure that the
wealthy weren't able to dodge all tax liability. To keep this tax
from taking a bite out of millions of middle-class taxpayers next
year, Rangel proposes yet another one-year extension of the
existing AMT "patch."
What's new, though, is Rangel's desire to pay for the patch by
raising taxes. Indeed, Rangel's proposal would continue raising
taxes year after year, to the tune of perhaps a half trillion
dollars over 10 years.
And that's the rosy scenario. An analysis by Republican
staffers of Ways and Means estimates that Rangel's approach would
actually hike taxes a whopping $3.5 trillion. That would be a
crushing blow for the American economy, jobs and wage growth.
But though the Rangel plan on balance is deeply flawed, it
includes some good features. For example, it ultimately would
repeal the whole AMT system - a long-overdue reform.
The AMT today is a tax policy without purpose, a complication
without virtue. The problem with the Rangel bill isn't with its AMT
repeal, but with how he hikes other taxes to makes up for the
revenue that the government would lose thanks to the repeal.
The Rangel bill would also trim the corporate income tax rate
from 35 percent to 30.5 percent. That's good, too: Our corporate
tax rate is among the highest in the world; it must come down
significantly for U.S. companies to remain competitive at home or
abroad. My only criticism on this score is that the rate should
have come down further. What's with the extra half a percentage
Of the bill's many bad provisions, the worst is a new 4 percent
surtax on married filers with adjusted gross incomes (AGI) above
$200,000 (4.6 percent for even higher income filers). What's with
that? Obviously, Chairman Rangel sees the importance of lowering
marginal tax rates - hence his cut on the corporate side. So why
raise tax rates for married couples, individuals and small
businesses? This is serious economic policy schizophrenia.
Note also that the surtax applies to adjusted gross income
(AGI), not taxable income - a backdoor way of phasing down the
amount of itemized deductions taxpayers can take. Perhaps Rep.
Rangel can explain what he has against charitable contributions, or
the deduction for state and local taxes or the home-mortgage
Another thorn is the bill's effort to increase the amount of the
child credit that is refundable. That's just a spending hike run
through the tax code. It has to be paid for by hiking taxes on
others - which Rangel obligingly does.
Congress excels at the game of tax and spend, but Chairman
Rangel is a master. Here, he manages an increase in both taxes and
spending in a single tax bill. With Washington already taking a
bigger cut of America's income than is the modern norm, Congress
should be looking to lower taxes, not raise them.
The Rangel bill has many serious problems. But it also has
virtues that ought not be lost or forgotten. AMT repeal and
corporate-tax-rate cuts should be high priorities for any tax
reformer. Hopefully, someone in Congress will introduce legislation
that delivers these roses, minus the thorns and manure.
JD Foster is the
Norman B. Ture senior fellow in the economics of fiscal policy at
the Heritage Foundation.
First appeared in the National Review Online
He billed it as "The Mother of All Tax Reforms." And it's certainly ambitious. But the long-awaited rewrite of federal tax policy, unveiled yesterday by House Ways and Means Committee Chairman Charlie Rangel, is going nowhere fast.
J.D. Foster, Ph.D.
Norman B. Ture Senior Fellow in the Economics of Fiscal Policy
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