Giant tax overhaul bill unveiled

AMT repeal. Lower corporate tax rates. A bill by Rep. Charles Rangel offers $1 trillion in cuts. Here's how he would pay for them.

By Jeanne Sahadi, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- No one actually expects lawmakers to overhaul the tax code this year, but House Ways and Means Chairman Charles Rangel (D-NY) planted his flag Thursday morning by unveiling a bill that he calls the "mother of all tax reforms."

Rangel said on Thursday the bill "would reform the tax code to provide a greater sense of equity and fairness."

Republicans are calling it the "mother of all tax hikes."

Tax policy experts and political observers do expect Rangel's bill to provide serious fodder for debate in 2008.

"This is a view of coming attractions," said Greg Valliere, chief strategist of policy research firm Stanford Washington Research Group.

One element of Rangel's bill that is likely to see a vote this year, however, is his proposal to extend for one year an Alternative Minimum Tax (AMT) patch. That patch will prevent 21 million taxpayers from having to pay the so-called "wealth" tax.

Long-term, Rangel has promised his bill will "provide tax relief to more than 90 million working families and cut the corporate tax rate to help American companies stay competitive internationally."

Republicans don't see it that way. "The basics of the package are simple: This is the largest individual income tax increase in history," said House Ways and Means Ranking Member Jim McCrery (R-La.) in a statement.

The Bush Administration isn't keen on it either. "The legislation unveiled today would dramatically raise taxes in ways that in my judgment would hinder America's ability to compete in the global economy," said Treasury Secretary Henry Paulson in a statement.

As with any "revenue-neutral" bill, which Rangel's is, there's no free lunch. The tax cuts proposed must be paid for by provisions that raise an equal amount of revenue.

And as with any tax reform proposal, there will be winners and losers.

In Rangel's bill, there are likely to be welcome tax cuts for both individual and corporate taxpayers, but just as many unwelcome tax hikes for some.

Here are some highlights:

Tax cuts for individuals

AMT repeal: The premier feature of Rangel's bill is a full repeal of the Alternative Minimum Tax (AMT), estimated to cost $800 billion over 10 years.

The AMT was originally intended for the wealthy few when it was created nearly 40 years ago. But because Congress never indexed for inflation the amount of income exempt from AMT and because it disallows a lot of popular tax breaks, tens of millions of middle-class taxpayers are at risk of having to pay it.

By definition, if you're subject to AMT you will pay more in taxes than you would under the regular income tax code.

Higher standard deduction: The majority of taxpayers take the standard deduction - they should benefit from an increase.

Rangel's bill calls for an increase of $850 for joint filers and $425 for single filers.

More generous tax credits for lower-income taxpayers: Rangel's bill would allow more low-income couples without children to qualify for the earned income tax credit. For taxpayers with kids, it would also increase the amount of the refundable child tax credit that may be claimed.

When a credit is refundable, that means taxpayers claiming it could get money back even if they don't make enough money to owe income tax.

Tax hikes for individuals

Add an income surtax: The bill proposes that high-income filers would pay at least a 4 percent surtax on adjusted gross incomes (AGI) above $200,000 for married couples filing jointly or above $150,000 for single filers.

So for a couple with $300,000 in AGI, they would owe the 4 percent surtax on $100,000 ($300,000 - $200,000). Hence, they would owe an extra $4,000 on top of their regular tax bill.

For couples with AGIs over $500,000, the surtax applied would be 4.6 percent.

With the repeal of the AMT, the majority of taxpayers with AGIs under $500,000 would pay less than they would under current law, the Tax Policy Center estimates. Under current law, the Bush tax cuts would sunset by 2011 and there would be no patch for the AMT.

More than any other revenue raiser in the bill, this measure is the one that will do the most to compensate for the $800 billion cost of AMT repeal. It's estimated to raise $832 billion over 10 years.

Leading Republicans - including McCrery and Senate Finance Committee Ranking Member Charles Grassley (R-Iowa) - argue that AMT repeal is the right thing to do to protect middle-income Americans from a tax they were never intended to pay, so there's no need to compensate for the cost because it was revenue that never should have been collected in the first place.

Lawmakers on both sides of the aisle and those in between have known for years that the AMT would start to affect middle- and upper-middle-income taxpayers barring any permanent changes to the law, but they nevertheless left it on the books. That means every federal budget projection has factored in the amount of revenue the AMT would raise once it starts hitting non-wealthy taxpayers, and spending commitments were made based on those projections.

Tax 'carried interest' as ordinary income: Under Rangel's bill, investment fund managers would have to pay income taxes on the portion of their compensation known as "carried interest."

Carried interest is the managers' share of a fund's profits and it is currently taxed as a capital gain at 15 percent.

Key Democratic lawmakers have argued that carried interest should be taxed as income because it really represents a fee for service, not a reward for taking an investment risk because managers don't necessarily invest their own money in the funds they manage.

The provision could effectively double the tax managers pay on carried interest since ordinary tax rates run as high as 35 percent.

This provision is estimated to raise $26 billion over 10 years.

The Private Equity Council said in a statement that the proposal was unfair: "[T]those partners who invest their time and effort to add value to an asset they own -- the very people who often are mainly responsible for any capital gains generated -- would be taxed at ordinary rates. We do not believe that is an equitable outcome."

Tax cuts for corporations

Lower corporate tax rate: The bill calls for a reduction in the top corporate income tax rate from 35 percent to 30.5 percent.

"A lower corporate tax rate is an unambiguous plus," said Len Burman, director of the Tax Policy Center.

In addition to those who always favor low taxes to promote economic growth, others might like this provision because "the lower the rate, the less incentive there is [for companies] to avoid taxes," Burman said.

Tax hikes for corporations

Disallow a favorite accounting method: Rangel's bill calls for a change in the way the inventories of companies are valued, the net effect of which would be a hike in their taxable income.

Eliminate various corporate tax breaks: The complexity of the corporate tax code is almost without measure, in part due to the myriad tax deductions, credits and other breaks that often favor some industries or products over others. Rangel's bill calls for the elimination of a host of those tax breaks.

Combined with a lower corporate tax rate, the streamlining of deductions promises "to make companies more efficient economically," Burman said. Too often, he explained companies will make economic decisions based on tax rules rather than simply the conditions of the market. Elimination of certain tax loopholes "makes the system more fair," he said.

Guard against potential transgressions: One provision would give the IRS more leeway to impose penalties on corporations that engage in sham transactions, said Clint Stretch, managing principal of tax policy at Deloitte Tax LLP.  Top of page

 

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.