It is hard not to like Congressman Charlie Rangel. He is engaging, likable, self-depreciating and he always spins a great story. As I watched him outline his tax reform proposal today I found myself being drawn in. Then I looked at the details.
Fixing the AMT must be done. This part is not in question. The AMT was imposed decades ago to address about a dozen very wealthy taxpayers that followed the tax code of the day but did not pay income taxes. The AMT was to make sure these taxpayers paid taxes no matter what. In the grand tradition of the U.S. Congress they screwed it up. The bill was not indexed for inflation. Over the years the AMT dragnet has ensnared more an more taxpayers, reaching well down into the middle class. Without at least a temporary fix something like 27M taxpayers will have to pay the AMT. That is a lot more than 12.
The AMT represents money that was never meant to be collected by the government. So by repealing the tax why do we have to raise other taxes to replace it? It was a mistake. Just repeal it and move on. But that's not the way the government works. They can't do without the money, but they believe you can do without the money.
Another item that Charlie Rangel wants to address is to lower the corporate income tax to a level where American companies are on par with their foreign competitors. He also want to provide more benefits to lower and middle income families.
I'm not going to get into the semantics of a "surcharge" on the rich verse a higher tax rate. I'll just do the math and let the numbers fall where they may.
For individuals making more than $150,000, or families making more than $200,000 the top marginal tax rate will increase 26% from 35% to 44%. This means that the top rate will translate into taking home 56 cents of every dollar instead of 65 cents of every dollar. It also means that there will be a huge marriage penalty for filing jointly.
The top corporate tax rate will be lowered to 30.5%. This makes us somewhat more competitive with the rest of the world; at least a step in the right direction. Corporations don't really pay taxes anyway. Individuals end up paying all the taxes at the end of the day.
A tax break to encourage manufacturing in the U.S. will be repealed. This tax break was just passed by the Democrats a couple of years ago over the objection of President Bush. Now they don't like it.
Another big tax increase will be on so called "carried interest", or the payments made to private equity and hedge fund managers based on capital gains in the funds they manage (no gains, no payment). Most other developed countries (U.K., France, Spain, etc. all treat carried interest as capital gains). This will raise the tax on long term capital gains for these individuals from 15% to 44%. This proposal will undoubtedly drive capital away from the U.S.
The beneficiaries of this massive tax hike ($1 trillion dollars minimum over 10 years) will include an expansion of the people that receive the earned income tax credit. Now this isn't really a tax cut. The people receiving this benefit don't pay taxes. We'll just write more people checks.
Many other people will receive additional tax breaks and benefits, such as through an expansion of the standard deduction by $850.
The end result is a very large tax increase on small businesses and capital investment. These are the elements of our economy that create the jobs for everyone else. To increase taxes just when the economy is slowing, hopefully to a soft landing, if the height of irresponsibility. It almost guarantees a recession.
But if your a Democrat and sorely desire that the next Presidential administration be a Democratic Administration having a soft landing is not politically beneficial to you. Harming the economy instead while at the same time buying votes through a massive redistribution of income sounds pretty good.
The Bush tax cuts and pro-growth policies have created jobs, grown real wages and delivered a surge of revenue into the federal coffers resulting in a historically low deficit. Charlie Rangel's plan would constitute the largest tax increase in U.S. history and a transfer of wealth on a massive scale.
I do think Charlie Rangel deserves some credit. He knows that this proposal will not be the final answer but he has put out a position that can be debated and molded. It is a complex issue. But I hope we end up promoting a strong economy that benefits all and not just punishing success.
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The inability of the Democratic Party to understand even the most basic tenets of economics is staggering. Even worse, one suspects that they understand, but buy votes and thus the power they crave, by peddling free-lunch solutions and punishing the "rich", whom everyone else knows as the "productive", the "motivated", the "entrepreneurial". I suppose you have no choice when your constituency is primarily those who suck their wherewithal from those who produce.
[Ayn Rand was right.]
We are f---ed when Hilary wins in '08 and the Dems pick up even more seats in Congress.
In a rational world, our tax system would tax consumption and leave savings and investment untouched. The socialist and anti-growth notion of "progressivity" would be allowed to die a quick and painless death. There would be no corporate tax, since--as you correctly point out--corporations are pass-through entities and their customers / shareholders pay "corporate" taxes eventually as this cost is passed on or subtracted from dividends or share values.
In short, the tax code would be designed to glean the minimum revenue needed to operate "essential" government functions with the least possible distortion of the private economy. It would not serve as a cudgel with which to implement redistributionist social policy, thereby enlarging further the government-teat class at the expense of those who contribute something.
And then I woke up.... Hard not to be cynical when you see what those f---ing morons in Washington will do when left unsupervised by adults.
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