Rate Increases for Executives, Financiers Would Pay for Package
By Jonathan Weisman and Jeffrey H. Birnbaum
Washington Post Staff Writers
Friday, November 2, 2007
The House Ways and Means Committee yesterday approved a $76 billion measure to stave off the growth of the alternative minimum tax and provide new tax breaks to middle-income homeowners and poor parents, proposing to pay for it with hefty tax increases on business executives and Wall Street financiers.
The committee's action was the opening salvo in a fight over the future of the U.S. tax code in the twilight of the Bush presidency, a battle that leading Democrats -- including White House contenders -- have proved singularly reluctant to join. But the insistence of House Ways and Means Chairman Charles B. Rangel (D-N.Y.), coupled with Democratic pledges to pay for any tax cuts they pursue, appears to be forcing the issue.
"We do have a very, very serious problem," Rangel said. He said he is determined to eliminate the looming traps in the U.S. tax code, even if the answer is "politically painful."
The bill that advanced yesterday is but a taste of the bigger struggles to come. When Rangel unveiled a far broader measure, which he called "the mother of all tax reforms," last month, it seemed like a political dream for Democrats -- a blueprint to cut and simplify the taxes of the poor and middle class, eliminate the hated alternative minimum tax that hits high-tax blue states, and pay for it all by soaking the rich.
Instead, Democrats took cover.
"There's a lot of moving parts. So I'm not going to get committed to a specific approach," Sen. Hillary Rodham Clinton (D-N.Y.) stammered during the party's presidential debate Tuesday night.
So flummoxed was the staff of House Speaker Nancy Pelosi (D-Calif.) that, when she initially embraced Rangel, stating, "I certainly support his plan," her aides altered the transcript of her news conference to say, "I certainly support his plan [to begin tax reform]." Pelosi said yesterday that she does, indeed, support the plan.
For a party that is supposed to be on the offensive, the tax code remains treacherous terrain. Even efforts to stave off for a single year the growth of the alternative minimum tax ran into opposition yesterday, and the overall plan has many more hurdles to clear before it can become law.
The alternative minimum tax was designed in the 1960s to prevent millionaires from using loopholes to avoid all tax liability. But later it was not indexed to inflation and, as time passed, increasing numbers of middle-income taxpayers began to be affected by it.
The Ways and Means bill would prevent the AMT from adding to the tax burden of more than 21 million middle-class families this year. It would also extend dozens of tax breaks scheduled to expire at year's end, expand the child tax credit for low-income families, and allow filers who do not itemize their tax returns to claim a federal tax deduction for local property-tax payments.
To pay for the changes, the bill would end deferred compensation plans for hedge fund managers who use offshore tax havens. It would also tax the earnings of private equity and hedge fund managers, most of whom are multimillionaires, at regular income-tax rates, not at the much lower rate on capital gains.
To Democrats, these are common-sense measures to ensure that the rich pay their fair share of taxes. But Republicans say no tax increases are preferable -- a position that is apparently shared in the Senate by Republicans and Democrats alike.
The difficulty and the political reluctance to tackle issues of "tax fairness" are all the more striking because the next president, whoever he or she turns out to be, will have to deal with the tax code.
On Dec. 31, 2010, the Bush administration's trillions of dollars in tax cuts will disappear overnight. If unaddressed, every income-tax rate would rise. The estate tax, which will die that year, would revive in full force. Tax rates on capital gains and dividends would soar. Child tax credits would be cut in half.
Democrats continue to stress they can turn the issue to their advantage, framing President Bush's tax cuts as a windfall for the rich at the expense of the middle class and future generations who will have to pay the bill.
"People are not averse to raising taxes on the very highest-income Americans," said Sen. Charles E. Schumer (N.Y.), chairman of the Democratic Senatorial Campaign Committee. But each time they have tried to put flesh on those bones, Republicans have jumped.
"The Democrats here in Washington have proven time and again that they approach every public policy issue, every conversation, every debate with one overriding principle, and that is that tax increases are the rule, not the exception," said House Republican Conference Chairman Adam H. Putnam (Fla.).
Rangel's tax overhaul would expand the standard deduction for the middle class while enlarging the refundable tax credits and the earned-income credit for the working poor. Gaping loopholes in the tax code would be closed to business accountants, but the corporate income tax would be lowered.
The alternative minimum tax would be repealed before it swallows the middle class. The repeal would be paid for by a 4 percent surtax on single taxpayers with incomes exceeding $150,000 and on couples earning at least $200,000, ensuring that the budget deficit would not be expanded.
By the Ways and Means Committee's reckoning, the plan would cut taxes for about 91 million families and provide a tax reduction to virtually every family with an annual income below half a million dollars.
Yet, since Rangel's plan was unveiled, it has been a political gift for GOP leaders, who plan to hang it around the necks of every Democrat running for office.
"Very seldom in politics do your opponents say, 'If we could just elect a president and if we can hold onto the House and Senate, here's what we're going to do: We're going to raise taxes on every small business in America that's not a corporation. . . . We're going to eliminate the marriage penalty relief. We're going to come up with a rate that's higher than even the countries in Western Europe,' " said House Minority Whip Roy Blunt (R-Mo.).
The National Republican Congressional Committee has sent 65 news releases into targeted congressional districts assailing what it calls "the mother of all tax hikes."
Even Democratic pollsters acknowledge the vulnerability. This week, the Democratic polling firm Greenberg Quinlan Rosner released a detailed memo describing an electorate seething with rage at Bush and eager for the kind of change Democrats say they stand for.
But the memo warned: "A lot of the discontent in the country could fragment and push voters to third-parties and some even back to the Republicans, particularly if progressives fail to tackle key grievances, like immigration and taxes."
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