Labeling it the “Mother of all Tax Reforms,” Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, has introduced a bill aimed at repealing the alternative minimum tax and cutting the top corporate tax rate while raising taxes in other areas, including on the salaries of hedge fund and private equity fund managers.The $1 trillion plan would reduce the top corporate rate from its current 35 percent to 30.5 percent.
Rangel does not expect the legislation, known as the Tax Reduction and Reform Act of 2007, to be voted on until next year, but he hopes to soon pass a stopgap measure to keep the AMT from spreading to 21 million more American taxpayers this year.
Congress enacted the AMT in 1969 to temper a public outcry that 155 people who earned more than $200,000 per year found themselves the beneficiaries of loopholes that allowed them to pay little or no tax. Since then, the AMT has undergone a series of temporary patches to stem the number of taxpayers who are affected. Rangel’s plan would apply one more patch in 2007, followed by the AMT repeal.
Rangel anticipates that the legislation would bring a net tax reduction to nearly all families with less than $500,000 in income. Married couples filing jointly would be able to claim another $850 on their standard deduction under the plan, and individual taxpayers would be able to claim another $425. More lower-income taxpayers would qualify for the Earned Income Tax Credit, and the refundable child credit would increase. “We have attempted to restore equity and fairness to the system,” Rangel said.
PAYING FOR IT
Permanently repealing the AMT would cost an estimated $800 billion over 10 years. To help offset that, Rangel has proposed a $48 billion tax increase on executives of hedge funds and private equity firms. Private equity firm managers would no longer have their incomes taxed at lower capital gains rates as carried interest, nor could hedge fund managers use offshore tax havens to defer taxes paid for investment services.
Rangel also wants to apply a “replacement tax” of 4.6 percent on income over $500,000 for couples, or $250,000 for single taxpayers. The bill would limit itemized deductions for the wealthy and phase out deductions for personal exemptions.
Last-in-first-out methods of counting inventory would be repealed under Rangel’s bill. The bill would also impose mandatory cost-basis reporting on brokers trading stocks, bonds, commodities and other securities.
However, David Lifson, the president of the New York Society of CPAs and a partner at Hayes & Co. LLP, said that patches “make it increasingly difficult to impossible to see the impact of social and tax policy decisions imbedded in the code.”
“Worse, there’s no way presently to determine if the cost of the patch is really paid for by the accompanying offsets,” Lifson said. “We think it’s time for fundamental tax reform of some sort, not patches.”
ALTERNATIVE ALTERNATIVES
Lifson and the NYSSCPA have recently proffered an AMT alternative — the Simplified, Exact, Transparent Tax, or SET Tax, a proposal that mandates a tax on all incomes over an established threshold, reduced by government-approved subtractions (such as mortgage interest or childcare), at an “economically appropriate and socially acceptable single rate.”
While the cut in the maximum corporate tax rate may help sway some votes in Congress, Chris Edwards, director of tax policy studies at the Cato Institute, doesn’t think it goes far enough. He pointed out that the average corporate tax rate in Europe is 24 percent.
“The federal corporate rate should be cut substantially and the federal government wouldn’t lose any money from that,” he said. He believes that the rate should be cut to 20 percent, not 30.5 percent, and that would encourage more companies to stop resorting to tax-avoidance schemes.
“I think pretty much everyone agrees something of this scale is unlikely to pass this year,” said Tom Ochsenschlager, vice president of taxation at the American Institute of CPAs. “And next year as well may be problematic because it’s an election year. It does raise taxes in certain areas, but everything he’s proposing has a tax benefit. The elimination of the AMT would be popular, but the question is, how do you pay for it?”
