Cousin to a Tax Reform

Monday, November 12, 2007

WHEN HE unveiled his tax overhaul plan recently, Rep. Charles B. Rangel (D-N.Y.) called it the "mother of all tax bills." Republicans immediately denounced it as the "mother of all tax hikes." Other Democrats, especially those running for president, treated it more like an unwelcome mother-in-law; Mr. Rangel's fellow New Yorker, Sen. Hillary Rodham Clinton, said that it was a "very courageous" step but that "I don't agree with all the details." Even Mr. Rangel, chairman of the House Ways and Means Committee, acknowledged that it had little chance of being acted on this year and probably slim hopes in 2008. The uproar over what is, in fact, a relatively modest reform proposal -- think of it as a scrawny second cousin -- offers a sad illustration of the gridlocked state of national debate on the subject of taxes.

Mr. Rangel's measure is an intelligently conceived, fiscally responsible effort to address a number of important tax issues. It would repeal the outdated and inefficient alternative minimum tax (AMT), eliminating the need to constantly apply one-year patches to the problem. It would enlarge the standard deduction, expand the earned-income tax credit for adults who live in households without children and increase the availability of the refundable child tax credit. To pay the $882 billion cost, Mr. Rangel would impose a surtax on upper-income taxpayers: 4 percent for married couples making between $200,000 and $500,000 and 4.6 percent for those with incomes over $500,000. Compared with current law -- that is, assuming a continuation of the AMT -- taxpayers making less than $500,000 would, on average, get a tax cut, with the greatest benefits going to households with incomes under $20,000 and to those with incomes between $75,000 and $100,000. According to the Tax Policy Center, about 86 million households -- 57 percent of taxpayers -- would receive a tax cut in 2008 and 3.6 million -- 2.4 percent -- would pay higher taxes.

Along with changes in the individual income tax, Mr. Rangel would make adjustments in the corporate tax, lowering the top marginal rate from 35 percent to 30.5 percent. That would be paid for by broadening the base, eliminating special deductions for domestic manufacturers and tightening taxation of overseas investments. As the Brookings Institution's Jason Furman has pointed out, the Rangel proposal would address the paradox that the United States has the second-highest corporate tax rate among the 30 leading industrialized nations but collects the fourth-lowest amount of corporate tax revenue as a share of the economy because its tax code is riddled with exceptions.

Republicans assail the Rangel measure as a huge tax increase, conveniently ignoring the truth that President Bush, among others, has made it clear that long-term AMT relief should be paid for, not simply tacked on to the national credit card. The more salient criticism of the Rangel plan is that it does not do enough to simplify the tax code or tackle the expensive irrationalities embedded in it -- ending the special treatment of employer-provided health insurance, for instance, or curbing the mortgage interest deduction. Moreover, Mr. Rangel's proposal does not deal with the looming expiration of the Bush tax cuts at the end of 2010.

His plan may not win Mother of the Year, but it is a sensible starting point for tax reform, which is more than anyone else in public life seems to be offering.

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