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October 27, 2007

Rangel's Reform

By

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 point?

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 deduction.

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

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