Saturday, October 7, 2006

New York Democratic Rep. Charlie Rangel, who would become chairman of the tax-writing House Ways and Means Committee if Democrats gain 15 seats next month, has said he would not seek to “roll back” any of the tax cuts Congress has passed during the first six years of the Bush presidency. Because those tax cuts will not expire until the end of 2010, Mr. Rangel has effectively guaranteed that the Bush tax cuts will remain in effect through the first two years of the next president’s four-year term — if Mr. Rangel is chairman of the tax-writing committee.

If repealing the Bush tax cuts before they are scheduled to expire will not be on the “to-do list” of a “Chairman” Rangel, then what items might be on his tax agenda for the next Congress? First and foremost, he is adamant about restoring the so-called PAYGO (pay as you go) rules, which were established in the 1990 deficit-reduction bill, extended in 1993 and 1997 but allowed to expire in September 2002. PAYGO rules applied to tax cuts and entitlement programs.

Theoretically, PAYGO required across-the-board spending cuts if Congress did not offset tax reductions or new entitlement spending by raising revenue elsewhere or cutting other areas of entitlement spending. In practice, Congress routinely waived PAYGO rules, including in 2001 after passing the 10-year, $1.35 trillion tax cut. Nevertheless, budget hawks, including former Federal Reserve Chairman Alan Greenspan, argued that PAYGO and its fiscal cousin, discretionary spending caps, helped to restrain Congress. Mr. Greenspan spent the last three years of his tenure futilely imploring Congress to re-impose PAYGO rules, which would become a priority under a Rangel regime.

Another Rangel priority would be to permanently shield middle-class taxpayers from the alternative minimum tax (AMT). Created in 1969 to ensure that wealthy people pay at least some income tax, in 2010 the AMT, which is not indexed to inflation, threatens to ensnare 17 million taxpayers with adjusted gross incomes between $50,000 and $100,000. Solving the AMT problem, however, is extraordinarily expensive. Even if the 2001 and 2003 tax cuts, which augment the AMT problem, are not extended, fully repealing the AMT would cost more than $600 billion over the next 10 years. Another near-term priority for Mr. Rangel would be to reduce the annual $350 billion “tax gap,” which represents the amount of legally required tax payments that go uncollected. Look for an effort to increase IRS enforcement. Mr. Rangel would probably try to limit offshore tax havens.

The Republican-controlled Congress has repeatedly tried to make permanent the 2001 and 2003 tax cuts, both of which Mr. Rangel vehemently opposed. Referring to the 2003 tax legislation, which reduced the top tax rate on dividends from 38.6 percent to 15 percent and lowered the top tax rate on capital gains from 20 percent to 15 percent, Mr. Rangel told the New York Times in April that “these tax cuts are beyond irresponsible” when “we’re in a war; we haven’t fixed Social Security or Medicare; we’ve got record deficits.” So, it is safe to say Mr. Rangel will not be supporting their extension.

Nevertheless, sometime between now and the end of 2010 (probably after the next president takes office), Congress will have to decide which of the 2001 and 2003 tax cuts will be extended. Mr. Rangel declines to give specifics. Identifying the tax cuts he would like to extend or implement indirectly reveals which tax cuts he wants to eliminate.

Worth noting are the details of a 10-year, $585 billion tax-relief package Mr. Rangel sponsored in 2001. It would have introduced a 12-percent tax bracket applicable to a married couple’s first $20,000 in income; alleviated the marriage penalty; and raised the earned income tax credit to offset part of the payroll taxes paid by lower-income workers. Mr. Rangel has also supported estate-tax relief that would raise the exemption level to $3.5 million ($7 million for couples), thus exempting an estimated 99.7 percent of Americans from paying the so-called death tax.

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