- The Washington Times - Friday, November 2, 2007

ANALYSIS/OPINION:

House Ways and Means Committee Chairman Charlie Rangel unveiled his eagerly anticipated tax-reform proposal last week. In an open letter to Treasury Secretary Henry Paulson Jr. appearing on today’s op-ed page, Mr. Rangel is asking the White House to offer its own tax-reform plan.The wily Harlem Democrat has dubbed his plan “The Mother of All Tax Reforms.” Republicans call it “The Mother of All Tax Hikes.” Welcome to Gucci Gulch, where the rhetoric and action will be furious well into next year. Is Mr. Rangel’s handiwork “The Mother of All Tax Reform”? Or is it “The Mother of All Tax Hikes”? It depends on how you define “tax reform,” “tax hike” and projected revenue. Some historical perspective may help.

The 1986 tax-reform masterpiece embraced by President Reagan and a bipartisan Congress revised the tax code by eliminating countless deductions and expanding the base. In the process, the top individual income-tax rate plunged from 50 percent to 28 percent, and the top corporate income-tax rate fell from 46 percent to 34 percent. On the other hand, the top capital-gains rate jumped 40 percent, rising from 20 percent to 28 percent. On balance, 1986 tax reform was revenue neutral.

In Mr. Rangel’s plan, some taxes will rise and others will fall. One very, very big tax — the alternative minimum tax (AMT) for individuals — will be completely repealed. As scored by the Joint Tax Committee, the Rangel plan is revenue neutral. It seems to us that if the same standards for tax reform that were applied to Mr. Reagan’s effort are applied to Mr. Rangel’s, then Mr. Rangel is entitled to refer to his plan as “tax reform.” However, because Mr. Rangel’s plan, according to Leonard Burman of the Tax Policy Center, “is not nearly as sweeping” as Mr. Reagan’s, calling it “The Mother of All Tax Reform” seems somewhat hyperbolic. That said, in an era when the Bush White House and its congressional Republican allies have been increasing the national debt an average of more than $550 billion per year over the last five years, it seems disingenuous for the GOP to call a plan that is revenue neutral “The Mother of All Tax Hikes.” That is particularly true when that charge repeatedly comes from a group, the Republican Study Committee, whose own AMT-repealing tax proposal — The Taxpayer Choice Act — would blow another trillion-dollar hole through the federal budget over the next 10 years.

Mr. Rangel’s political problem is that his plan repeals a monster tax (the AMT) which, on the one hand, has for years represented a colossal threat to the middle class, but which, on the other hand, has been annually “patched” so that much of the middle class has yet to feel its wrath. Thus, he will receive little gratitude, although it would be utterly irresponsible not to finally slay the AMT monster.

By repealing the AMT, Mr. Rangel eliminates $800 billion in projected income-tax revenues over the 2008-2017 period. Increasing the standard deduction would cost another $48 billion over 10 years, while “patching” the AMT for 2007 costs another $50 billion. Other changes relating to the refundability of the child tax credit and the Earned Income Tax Credit would cost nearly $40 billion over 10 years. Mr. Rangel’s plan would lose nearly $365 billion more in projected 2008-2017 revenues by lowering the top corporate income-tax rate from 35 percent to 30.5 percent. Now, it is important to note that the latest budget blueprints prepared by both the White House and the Democratic Congress explicitly project collecting all of these revenues, which cumulatively total $1.3 trillion. And the budget-deficit estimates in these blueprints are also directly related to these receipts, which Mr. Rangel’s plan would erase.

To achieve neutrality in projected revenues and deficits, Mr. Rangel’s plan raises other taxes. He broadens the corporate tax base by eliminating numerous corporate deductions and tax preferences. On the individual income-tax front, his plan would add a four percentage-point surcharge on adjusted gross incomes (married, filing jointly) between $200,000 and $500,000 and a piggyback 0.6 percentage-point surtax on incomes above $500,000. The top capital-gains and dividend tax rates would rise from 15 percent to 19.6 percent.

There’s more than enough in Mr. Rangel’s plan to criticize. Before a real debate can begin, however, Mr. Paulson and the White House must deliver their long-promised revenue-neutral plan to slay the AMT monster and make America’s corporate income tax more competitive internationally.

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