Sweeping tax reform introduced in Congress

WASHINGTON — Congress's chief tax writer announced a far-reaching tax reform bill Thursday, touching off a political battle that could extend beyond next year's presidential election.

Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, said he wants to restore "equity and fairness" by raising taxes on high-income Americans while cutting them for average taxpayers.

"We are not raising taxes," Rangel said at a news conference. "We are restructuring the rates of taxes so that at the end of the day, 90 million taxpayers would walk away? (saying) 'I got a decrease in taxes.' "

Rangel's reform would repeal the Alternative Minimum Tax (AMT), an unpopular system that's poised to affect 23 million households this tax year, and expand benefits aimed at the middle class. It also would lower the corporate tax rate.

To offset those cuts, it would impose a surtax on the wealthy and erase many deductions now cherished by corporations. Rangel said his package would not change the total amount of money going into government coffers.

Republicans rushed to denounce the plan, which they say would raise more than $1.3 trillion in new taxes. Speaking for the Bush administration, Treasury Secretary Henry Paulson said in a statement he opposes Rangel's legislation because it "would dramatically raise taxes in ways that in my judgment would hinder America's ability to compete in the global economy."

House Republican Leader John Boehner, R-Ohio, labeled the Rangel bill "a gigantic job-killer."

Rangel's plan would:

— Increase the benefits to middle- and lower-income taxpayers from the standard deduction, the Earned Income Tax Credit and child tax credit. The standard deduction for married couples would rise by $850, and for individuals by $425.

— Lower the corporate income tax rate from 35 percent to 30.5 percent, cutting revenue by $364 billion over 10 years. It would offset that loss by eliminating certain targeted tax breaks for business.

— Tax the profits shared by some private equity fund managers on the investments they handle, known as "carried interest," at ordinary income tax rates, not the 15 percent capital gains rate. Such a change would raise nearly $26 billion over 10 years.

— Limit a corporation's ability to defer taxes from overseas operations.

One of the most controversial changes involves the AMT, which Rangel wants to replace with a surtax of up to 4.6 percent for couples with annual incomes exceeding $500,000.

The new tax would apply to adjusted gross income, which is calculated before deductions are subtracted. This would include even capital gains and dividends, effectively raising the top investment-income rate to 19.6 percent from the current 15 percent.

Congress created the AMT in 1969 to ensure that the wealthiest Americans would pay at least some taxes, even if they made extensive use of tax shelters and loopholes.

But the law did not take inflation into account. As a result, it ensnares more and more average families taking deductions and exemptions for mortgages and children. For example, in the 2007 tax year, the AMT would be triggered if a typical tax filer with four dependent children had income of just $56,841.

Since 2001, Congress has approved temporary "patches" three times to push the income trigger points higher, keeping the number of people affected to less than 4 million.

Rather than continue passing "patches," Rangel wants to eliminate the AMT, yet still make sure the wealthiest Americans pay heavier taxes.

"We should take a look at the disparity that exists between the middle income and those that are more fortunate in income and try to spread the tax relief," he said.

Rangel conceded his sweeping legislation, which he has been calling "the mother of all reforms," could not be enacted this year. But he hopes to move forward in the spring.

But time is running out to once again temporarily patch the AMT: IRS forms for this tax year start going to the printer on Nov. 7.

Rangel said that he will offer a separate package that will include the AMT "patch" for this tax year and extensions of expiring tax breaks. To offset the loss of those revenues, Rangel said some provisions from his comprehensive reform legislation would be included.

The broad overhaul plan is widely seen as a blueprint for tax reform if Democrats win control of both Congress and White House in 2008. But Rangel, 77, said he isn't waiting for the election, and will push his bill in Congress next year.

He added, though, that he'd be "willing to work with any president in the next election, no matter who she is." Rangel supports the candidacy of Sen. Hillary Clinton, D-N.Y.

Marilyn Geewax is a Washington correspondent for Cox Newspapers.