Rep. Rangel's Tax Proposal

I read an article about Rep. Charles Rangel's recent tax proposal in the Business Section of the L.A. Times for October 26. Some of my Republican friends may brand me a heretic when I say that his proposal is worth serious consideration. The ones who know me really well may understand why, though, and those who don't can read my posting on taxes (9/14/2007) and my posting on income inequality (6/24/2007) to sample some of my ideas on the subject. Like Rep. Rangel I firmly believe that we need to restore fairness to the tax code. I also think the plan needs some refinements.

If I can believe the Congressman and the article, the Rangel plan is revenue neutral, that is, the proposed tax increases in some areas would be offset by decreases in others. The right wing critics complain about the increases but do not mention the offsetting decreases. If you read my posting on income equality, you will see that I do not oppose shifting some of the tax burden to the extremely wealthy people.

When we talk about tax reforms for fairness, however, we need to be very clear on how the income is defined. That is, are we talking about gross income, or adjusted gross income, or taxable income? Both the second category and the last take into account adjustments and deductions that allow wealthy taxpayers to duck their fair share.

Another concern in Rep. Rangel's proposal is whom we define to be weathy. According to the Times article, less than 2 million taxpayers would see a tax increase under the plan, predominantly those who earn more than half a million dollars per year. Half a million is the number I would have picked, if it is considered to be gross income. But the Rangel plan imposes a 4% surcharge on households that earn at least $200,000.00 for couples filing jointly. That seems to dip well below the half million earned dollars per taxpayer mentioned in the article. Whatever number is chosen, it should be indexed in some way to inflation.

The plan increases the standard deduction, increases the Earned Income Tax credit for the working poor, and increases the refundable child tax credit. These changes clearly benefit wage earners who are not considered to be wealthy.

The plan proposes to cut the top tax rate for corporate income from 35% to 30.5%. This feature should diminish the concerns that the plan will cause job losses and other adverse economic impacts. The plan also eliminates current provisions that Rangel considers to be loopholes. I don't know which ones they are, but I am sure that there are some loopholes worth closing. The problem I see is that any increase in the taxes for businesses will be passed on to wage earners in the form of higher prices and/or work force reductions. That does not hold in the case of individual income--an increase in the top tax rate for wealthy individuals is worth considering.

The plan proposes eliminating the Alternative Minimum Tax. The fact that the income level at which the A.M.T. kicks in is too low and is not being adjusted for inflation makes me agree with this aspect of the plan. But the A.M.T. should only be eliminated if we also eliminate the loopholes and adjustments that allow members of the half-a-million-dollar-plus club to claim zero or minimal taxable income.

The plan increases taxes for managers of private-equity funds, who have been claiming their earnings at the 15% capital gains rate. This change is long overdue.

For many of the people in the half-a-million-dollar-plus club, wages did not comprise the majority of their income, and they did not pay at or near the top bracket rate of 35%. That's because of the myriad of provisions that create loopholes by allowing adjustments, deductions, and the re-categorizing of income. Serious consideration should be given to eliminating some of those provisions. I don't expect much help from Congress in this direction, as many of our legislators are members of the half-a-million-dollar-plus club, and they won't vote against their own personal interest.

Some people are terrified at the thought of a flat tax based on total income, above some defined poverty level, from all sources. If we could ensure that ALL income would be reported, the actual rate of that tax would lower than most people fear. But if we are unwilling to take the flat tax leap, then Representative Rangel's plan (with some fine tuning) deserves some serious consideration.