WASHINGTON – The House's top Democratic tax writer outlined a $1 trillion plan Thursday to eliminate the alternative minimum tax and ease the tax burdens of most people by asking the rich and some companies to pay more.
"We have attempted to restore equity and fairness to the system," said Rep. Charles Rangel, chairman of the House Ways and Means Committee. He said his plan would mean net tax cuts to almost all families with incomes under $500,000.
Rangel, D-N.Y., said the more ambitious aspects of his proposal, which includes cutting the corporate tax rate and ending some business provisions, would take time "to be aired out." He said at a news conference he hoped the proposal might move forward by next spring.
Republican leaders did not need time to take a stand. House GOP leader John Boehner of Ohio said the "mother of all tax hikes" would "doom our economy" and put people out of work. The second-ranking House Republican, Rep. Roy Blunt of Missouri, said his party would use the proposal to show Democratic support of tax increases. "Very seldom in politics do people give you this kind of gift," he said.
Rangel shrugged off such criticism. "We are not raising taxes," he said. "We are restructuring the rates of taxes." He said that under his plan, 91 million families would receive tax relief.
House Speaker Nancy Pelosi, D-Calif., said she "certainly" supported the plan and indicated there would be vigorous debate among Democrats. "In our caucus we'll have our usual exciting, dynamic give-and-take on the subject," Pelosi said.
Rangel's proposal includes a one-year fix to shield middle-income families who could otherwise be hit by the alternative minimum tax. It also would extend several dozen tax breaks in such areas as research and development credit, deductions of state and local sales taxes, and credits for teachers and charitable donations.
Congress is expected to act on the AMT fix and the extensions this year, although Rangel acknowledged differences with the Senate on how to pay for it.
Treasury Secretary Henry Paulson this week warned in a letter to Congress that failure to pass a fix soon would expose 21 million taxpayers to the tax, with an average tax increase of $2,000.
The tax was created in 1969 to ensure that a very small number of wealthy people could not use tax breaks or deductions to eliminate their entire tax bill. But the tax was not indexed to inflation, and every year more people are exposed to it. Nearly 4 million taxpayers were subject to this tax in 2006, and the number is expected to multiply in 2007.
Rangel's proposal would extend for one year the current-law AMT relief for nonrefundable personal credits, at an estimated cost of $47 billion over 10 years. He suggested that could be paid for by preventing investment fund managers from paying taxes at a lower capital gains rate and stopping hedge fund managers from using offshore tax haven corporations to defer taxes.
Democrats are committed to pay-as-you-go rules requiring that ways be found to pay for any spending increases or tax cuts so as not to add to the federal deficit.
The permanent repeal of the tax would cost nearly $800 billion over 10 years. That would be offset by applying a replacement tax of 4 percent of married couple income above a certain level, not to be less than $200,000. The tax would be 4.6 percent on income in excess of $500,000, or $250,000 in the case of a single taxpayer. High-income individuals would see a limitation on itemized deductions and a phase-out of deductions for personal exemptions, raising $29 billion over 10 years.
The bill would reduce the top corporate marginal tax rate from 35 percent to 30.5 percent, at a cost of $364 billion over 10 years. This would be paid for in part through such measures as repealing the domestic production activities deduction and requiring that U.S. companies that defer income through controlled foreign corporations also defer the deductions that are associated with this income. The last-in-first-out accounting method would also be eliminated, saving $106 billion over 10 years.
Under the Rangel plan, with costs and new revenues over a 10-year period:
— Married couples filing jointly would be entitled to take an additional $850 as a standard deduction, at a cost of $48 billion.
— The number of lower-income taxpayers qualifying for earned income credit would grow, at a cost of $29 billion.
— The refundable child credit would be increased, at a cost of $9 billion.