- The Washington Times - Thursday, November 1, 2007

ANALYSIS/OPINION:

Sometimes lawmakers legislate and other times they immunize. The Tax Reduction and Reform Act of 2007,unveiled last week by House Ways and Means Chairman Charles Rangel, New York Democrat, is plainly the latter — a heavy dose of rhetorical inoculation aimed at improving the party’s image, without much chance of passage. But from the standpoint of a clearly slowing economy, it is still a risky maneuver that could cause just the opposite reaction.

From a purely political perspective, many Democrats think the bill is just what the doctor ordered. The party suffers from an image virus — a pesky bug infecting them with tax-increase fever. Mr. Rangel’s new bill aims to vaccinate the party from that illness.

Democrats possess a huge appetite for bigger government. The House this year alone has passed over $100 billion in new revenue hikes to offset spending on everything from energy programs to farm legislation and children’s health insurance. Now introducing legislation that cuts some levies gives them the rhetorical ability to say their tax policy gears move in a direction other than higher.

Much ballyhooed as the first major tax reform proposal in over 20 years, Mr. Rangel and his colleagues see the bill as a way to establish themselves as the party of “middle class” tax-cutters. To burnish those credentials, the measure permanently repeals the Alternative Minimum Tax for certain taxpayers, while offering other targeted benefits such as increasing the standard deduction, modifying the earned income credit for some, and making changes in the refundable tax credit.

The legislation doesn’t stop with tax reductions for moderate-income individuals. It also cuts the top marginal tax rates across the board for corporations from 35 percent to 30.5 percent. But that’s about where the “tax cutting” hits a brick wall. While Democrats chest thump with one hand, watch what they do with the other.

The bill “pays” for these reductions by including a host of tax increases, such as the elimination of many business tax preferences, a new tax on carried interest imposed on investment fund managers, and a boost in the top marginal rate to 44 percent for individuals earning over $150,000 per year. Significantly, it also assumes no extension of the 2001 and 2003 tax cuts, meaning a hefty increase post-2010 as levies on dividends and capital gains, the marriage penalty and the death tax all snap back to their higher pre-cut levels. Republicans on the House Way and Means Committee estimate the individual income top tax rate in the United States will rise from 35 percent to 44 percent under this plan. By contrast, other developed countries have an average top marginal tax rate of 35.7 percent, and only five OECD countries would have higher top marginal tax rates in 2011 than the United States, according to the GOP staff on the tax-writing committee. And many who pay taxes at the “individual” rate are actually small businesses and farmers. Taken together, these and other provisions in the legislation would produce the largest tax increase in American history — another reason why Democrats are desperate to find some kind of antidote to this charge.

But politics aside, the Democrats’ inoculation gambit could also pose disastrous consequences for jobs and growth. The U.S. economy is experiencing a slowdown right now resulting from the deflating housing bubble and the accompanying stresses in the financial markets. Business groups such as the Tax Relief Coalition quickly denounced the plan, saying it “would do incalculable harm to America’s small businessmen and women.” While this legislation will not become law this year or next, is it a harbinger of what lies ahead if Democrats end up in charge of Congress and the White House after 2008? Clearly, it’s another example of partisan positioning triumphing over bipartisan accomplishment — a reflex seemingly imbedded in the DNA of the House majority. But the mere threat of significant tax increases on investment and capital formation, linked with the possibility of a new Democrat in the White House not immune to higher taxation, could also cause significant economic behavioral shifts at a challenging time for growth and jobs.

Democrats want to demonstrate that they do not suffer from tax-cut amnesia. But given its colossal size and the economic tremors it would cause, the victims of this tax package are not likely to forget which party set those events in motion making this inoculation a placebo.

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