Chair of House Tax-Writing Committee Proposes Comprehensive Tax Reform

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Congressman Rangel's Tax Bill Would Make the Tax Code Simpler, More Progressive, and the Changes Are All Paid For

House Ways and Means Chairman Charles Rangel introduced his proposal Thursday to address the Alternative Minimum Tax and simplify the tax code without increasing the federal budget deficit. One title of the bill would address the income tax for individuals, including the AMT reform which would be paid for by reducing the Bush tax cuts for the wealthiest Americans and closing some unfair loopholes that benefit the very richest taxpayers. The other title of the bill would simplify the corporate tax by trading a lower corporate tax rate for the elimination of some inefficient loopholes. Lawmakers may take some of the provisions, such as a one-year fix for the AMT, and pass them more quickly as a separate, smaller bill.

Individual Income Taxes Would Be Simpler and More Progressive

Several Republican lawmakers demand that Congress repeal the AMT without replacing the revenue because it was never "intended" to be collected. This is nonsense, because the Bush Administration very intentionally declined to address the AMT when it passed tax cuts. The President's most recent budget assumes that the AMT will, in fact, expand its reach to millions of families after 2007.

Congressman Rangel's bill includes a "patch" for the AMT for this year and then repeals it altogether. The revenue is replaced largely with a surtax on families with incomes over $200,000. These families have benefited the most from the Bush tax cuts. Nearly half of the benefits from the Bush tax cuts flow to the richest five percent of taxpayers, whose income is above $170,000. In 2010 well over half of the benefits will flow to this group if the Bush tax breaks are not repealed. So Congressman Rangel's bill would reduce the bonanza of tax cuts enjoyed by this elite group of families to help pay for AMT relief for families who are somewhat more likely to be middle-class.

In addition, the bill would eliminate the loophole for "carried interest" as many advocates have urged because it allows wealthy fund managers to pay a lower tax rate than middle-income people.

Congressman Rangel's bill also includes important improvements in the Child Tax Credit and the EITC for childless workers. The Child Tax Credit is currently structured so that the poorest families cannot benefit from it, while the EITC for childless workers is currently so low that childless workers can live in poverty and still pay federal income taxes, in addition to federal payroll taxes.

Corporate Taxes Would Be Simpler and More Efficient

The bill reduces the corporate rate from the current 35 percent to 30.5 percent and replaces the revenue lost from this change by eliminating certain loopholes. Corporations should consider themselves lucky to be offered this lower rate. CTJ has argued recently that Congress should close corporate tax loopholes and not lower the corporate rate but instead use the new revenue for deficit-reduction or to address the many needs this country faces right now.

It's often said that the U.S. corporate tax rate of 35 percent is among the highest in the world, but really the effective rate is much lower because of the loopholes that corporations use to lower their taxes. The United States collects less in corporate taxes as a percentage of GDP than all but two OECD countries. In other words, corporations should be thankful they're being offered any tax breaks at all.

Wisely, the bill includes changes to offset the costs of the rate reduction. These include eliminating several existing tax provisions, including a tax subsidy for manufacturers, an accounting method that allows oil companies to understate their profits, and another provision that encourages companies to move operations offshore.

Republicans Defend Government Interference in the Economy Through the Tax Code, Defend Complexity in the Tax Code

Republicans in Congress have placed themselves in the strange position of defending a system that taxes some millionaires at lower rates than middle-class families, defending a tax system that provides subsidies to certain businesses at the expense of the rest of the taxpayers, and defending the complexity in a tax code that causes business decisions to be made for tax reasons rather than economic ones. Treasury Secretary Henry Paulson went so far as to say (subscription required) "The corporate proposals will hurt the ability of our businesses and workers to compete in a global economy." This is despite the fact that closing loopholes to pay for a lower tax rate is an idea that he and others in the Bush administration proposed during the summer.

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