Democrat Proposes Overhaul Of Taxes

Sen. Charles Rangel (D-N.Y.) calls his plan
Sen. Charles Rangel (D-N.Y.) calls his plan "the mother of all reforms." (By Mark Wilson -- Getty Images)
By Jeffrey H. Birnbaum
Washington Post Staff Writer
Friday, October 26, 2007

Setting the stage for a bitter election-year battle over the direction of U.S. tax policy, the House's chief tax writer yesterday unveiled a broad proposal that includes repealing the alternative minimum tax as well as reducing taxes on an estimated 91 million mostly lower- and middle-income Americans while raising them for many in the upper income brackets.

The plan would not change the amount of revenue collected, according to the staff of the Joint Tax Committee, but it would alter existing law to shift $1 trillion of the tax burden over 10 years. Described as "the mother of all reforms" by its author, House Ways and Means Chairman Charles B. Rangel (D-N.Y.), it was immediately denounced as "the mother of all tax hikes" in a statement from Republican leaders.

"This bill sets a marker and creates a controversy," said Clint Stretch, managing principal for tax policy at the accounting firm Deloitte & Touche. "The bill lays out where the Democrats have been already and where Republicans do not want to go."

Rangel's bill is unlikely to be voted on or even debated before next year. Many Democratic leaders have endorsed components of the bill, but Republicans have generally rejected it, and the debate is likely to spill into the 2008 presidential campaign.

Among the bill's most controversial elements is a surtax of four percentage points on married couples with adjusted gross income of more than $200,000 and 4.4 percentage points for couples with more than $500,000 in income.

The bill also targets the managers of hedge funds and private-equity firms. The executives' earnings would be taxed at ordinary income tax rates, which are more than double the capital gains rate they now pay. Hedge fund operators would also lose their ability to defer income taxes through the use of offshore havens.

At the other end of the spectrum, Rangel's proposal would expand the number of taxpayers who qualify for the earned income credit and would increase the size of the refundable child credit -- two major benefits for low-income families. It would also increase the standard deduction, allowing more families with low incomes to escape paying income tax.

This would have a negligible effect on tax revenue because people with extremely low incomes contribute little toward the bottom line. Overall, Stretch said, "the bill would shift income tax burdens from middle-class and upper-middle-class taxpayers to high-income individuals."

Corporations would face several tax increases, but also would receive some relief. Manufacturers, U.S. companies with foreign subsidiaries and oil companies, retailers, wholesalers, and other industries that use the last-in, first-out method of accounting would have their taxes increased. The measure would reduce the top corporate tax rate to 30.5 percent from 35 percent.

Business representatives were not happy with the plan. "There isn't much relief there," said R. Bruce Josten, executive vice president of the U.S. Chamber of Commerce. "This is going to be a problem for major corporations and also for a lot of small businesses, too."

He added: "This bill sacrifices one taxpayer for the sake of another."

House Speaker Nancy Pelosi (D-Calif.) told the Associated Press that she expected differences of opinion even among Democrats. "In our caucus we'll have our usual exciting, dynamic give-and-take on the subject," Pelosi said.

CONTINUED     1        >

© 2007 The Washington Post Company