The voices of Tax Policy Center's researchers and staff
Let’s start with the obvious: The tax plan rolled out today by House Ways & Means Committee Chairman Charlie Rangel (D-N.Y.) is not the “mother of all tax reforms,” the congressman’s claim notwithstanding.
However, it would do some pretty big things, such as eliminating the Alternative Minimum Tax, raising individual rates, cutting corporate rates, and slashing tax benefits for big multinationals. But it largely ducks a whole host of major issues, especially how we should tax savings vs. consumption and the tax treatment of health insurance.
What I like about the plan:
1. It puts tax reform back on the table. The last time the idea was part of the policy conversation was two years ago, when President Bush’s Advisory Panel on Federal Tax Reform issued its report. The ideas raised by that group may have grown to become the true mother of all tax reforms, but Bush strangled them at birth. With the Chairman of the Ways & Means Committee signaling his enthusiasm for the issue, we may be starting a new discussion. Not this year, and probably not next year. But perhaps in 2009.
2. It gets rid of the AMT in a more or less fair way—by raising rates on the upper-brackets, including those most likely to get hit by the AMT today. Somewhat higher rates in return for AMT relief will be a good deal for most.
3. It increases the standard deduction by $850 for joint filers. It is about time.
4. It slashes the corporate rate from 35% to 30.5% and closes some tax loopholes.
5. It dumps the domestic production deduction which was adopted as part of international tax “reform” a couple of years ago. It is past time to set this dreadful provision afire and float it out to sea.
What I don’t like:
1. The way AMT relief is funded. Instead of simply raising rates, Rangel creates a “replacement tax” on adjusted gross income, which includes a lot more than what we now consider taxable income. This makes some sense because this broader base would capture income that tax code now misses, but it can get pretty complex. Worse, Rangel’s plan would restore the phase-outs of itemized deductions and the personal exemption (so-called Pease and Pep). If he wants to raise rates on rich people, I wish he’d just say so.
2. It is too timid when it comes to closing loopholes. No fewer than 32 tax “extenders” would live for yet another year. The biggest tax expenditures, such as employer-sponsored health insurance and mortgage interest, are untouched.
3. By widening the gap between corporate and individual rates, the plan creates lots of new opportunities for tax arbitrage by the super-rich.
The plan is a good start. After all the knee-jerk opposition dies down, I hope Republicans eventually take Rangel up on his offer to start talking about broad-based reform.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.