Commentary: The Tax Reduction and Reform Act of 2007

There used to be a time when the Republicans were known for their fiscal conservatism. The pejorative the Republicans use for Democrats, "Tax and spend" rings hollow these days when contrasted with their practice: "Don't tax and yet spend." Compare the success of Clinton in balancing the budget with Bush's growing deficits resulting from his embrace of the Reagan notion that tax cuts for the wealthy "trickle down" and generate increased revenues. Nobel Prize winning economist Joseph E. Stiglitz wrote in the December 2007 Vanity Fair, The Economic Consequences of Mr. Bush, “The damage done to the American economy does not make front-page headlines every day, but the repercussions will be felt beyond the lifetime of anyone reading this page...”

"Don't tax and yet spend" came to the fore Thursday, October 25 with the Republican critique of Ways and Means Chairman Charlie Rangel (D-NY) submitted his Tax Reduction and Reform Act of 2007, HR 3970 (summary). Although clearly wanting to make the tax system more progressive, Rangel included items espoused by Republicans, such as elimination of the Alternative Minimum Tax (AMT) and a cut in the overall corporate tax rate, the jockeying for position started immediately. The difference between the Republicans and Rangel is that he wants to offset the cost of cuts.

House Republican Whip Roy Blunt (MO) issued a statement October 25 through PRNewswire entitled Blunt: Democrats Outdo Themselves with 'Mother of All Tax Hikes, saying he was writing about Rangel's plan.

I question Blunt’s use of "working families." I'm not arguing about whether those who would bear higher taxes under the bill work or not. I object to lumping them in with the rest of us, using the subtle linguistic conflating of the term "working families" with "working class."

At one time, "working class" was used in contrast with the terms "middle class" and "upper class." It generally referred to those who earned an hourly wage through physical labor. When unions in this country raised the wages of their members and other workers, the class line in terms of income blurred, especially as compared to lower-salaried professionals such as teachers. Lines further blurred with the growing economic insecurity of the "middle class" besieged with relatively flat salaries, increasing costs of medical insurance and real estate (to name two) and the loss of some of their jobs through outsourcing. But given continuing good economic fortunes of those at the top and their relatively few numbers, it seems odd to conflate everybody into a group. It could be argued that it makes the term meaningless.

Rangel would offset the cost of eliminating the alternative minimum tax in two stages. This year he would limit the number of households subject to this tax originally created to stop rich families from evading taxes. Last year, the AMT affected 3.5 million households. The number could jump by 21 million households this year unless Congress takes action. He plans to raise enough money to roll back this AMT “surge” by eliminating the “carried interest” loophole which allows private equity and hedge fund managers avoid billions of dollars in taxes annually. To understand this issue, you might want to read "The Taxation of Carried Interest " by the Director of the Congressional Budget Office, Peter R. Orszag, a written version of his testimony before the Senate Finance Committee on July 11. Under Rangel’s proposal, the private equity and hedge fund managers would also start paying taxes on income held in offshore accounts.

Majority Leader Harry Reid (D-NV) does not intent to support a carried interest  tax this year in the Senate, according to The Washington Post’s Jeff Birnbaum writing October 9 in Buyout Firms to Avoid a Tax Hike. He detailed extensive lobbying aimed at achieving this result by  “more than 20 lobbying firms, including the capital's two largest, Patton Boggs and Akin Gump Strauss Hauer & Feld. Former senator John Breaux (D-La.) is on the case for Patton Boggs. Akin Gump's team includes Kenneth B. Mehlman, a former chairman of the Republican National Committee. Also on retainer to private-equity firms are former senator Don Nickles (R-Okla.) and many former congressional aides.”

Birbaum adds that “Private-equity firms have already distributed at least $5.5 million in lobbying fees, quadruple what they spent in all of 2006, according to Bloomberg News.”  Additionally, “Some of the most prominent executives in the industry have made the rounds of senior lawmakers in recent months. Among those seen on Capitol Hill were former commerce secretary Peter G. Peterson of Blackstone Group and David M. Rubenstein of Carlyle Group.”

According to Birnbaum, the financiers have received help from  business groups like the U.S. Chamber of Commerce and real estate trade groups such as the Real Estate Roundtable who “have sent letters to lawmakers and testified before congressional committees against the tax increase because it would also impact the managing partners of their developers.”

The second stage of Rangel’s tax plan, to take place next year would move for a vote to abolish the AMT entirely. He would offset this cost through a “surcharge” --an additional 4 percent tax on incomes over $200,000 and an extra 4.6 percent on incomes over $500,000. These surcharges increase the top tax rate on ordinary income to 39.6 percent and the top rate on dividends and long-term capital gains from 15 to 19.6 percent. To read more about the AMT, see OMB Watch's summary, "AMT: Prospects for reform and the paygo challenge."

Additionally, Rangel proposes to lower the corporate income tax rate to 30.5%. He would do this by eliminating tax provisions that favor some industries over others. The Wall Street Journal provided a good rundown of the effects of the bill on October 26 in "Tax Blueprint Mixes Pain, Gains: Rangel Proposalis seen as shaping long-term debate" by Sarah Lueck and Jessie Drucker. I'm a fan of Drucker for his articles on Wal-Mart but believe the writers editorialized a bit in their news coverage, when they wrote, “The broad attempt to revamp the tax code introduced yesterday by the House's top tax writer could hurt oil and technology companies, manufacturing firms and others in order to fund an across-the-board cut in tax rates long sought by many corporations.”

Substitute "displease" for "hurt" and I'd find the article more neutral. Interestingly the article discloses that, “Industries are likely to fight any attempt to end tax preferences because few big companies pay anywhere close to the required rate of 35%. The true rate for thousands of big companies is generally in the mid-20% range, according to Internal Revenue Service data and other research.”

And then of course, there are all kinds of ways of expensing profits.

The conservative Cato Institute has argued that increasing the tax rate on carried interest is the first step to increasing capital gains. Financier Warren Buffet, has long argued, that he and others of his income bracket pay far too few taxes.  In the coming months, it will be interesting to see which side prevails.

Congressional Quarterly did a good job in its in its October 26 article, "Republicans Eye 2008 and Ratchet Up the Rhetoric on Rangel's Tax Plan." Unlike more polemic stories masquerading as news, this gives the major outlines of the tax policy proposed while identifying rhetoric on both sides for what it is: rhetoric. The article quoted Blunt as saying, Very seldom in politics do your opponents give you this kind of gift.”

Rangel replied, “Just don’t say it’s a dramatic tax increase, if I’m running around saying that 90 million people are going to get a tax cut. And if you believe that, tell me, who are the people that are getting this tremendous tax increase? And I can count, and 90 million people are not included in that number.”

Most telling regarding the outcome is this observation, The winner in the 2007-08 tax debate may be the party that best translates the Washington-speak of budgets, baselines and revenue neutrality for voters.”

LLRX readers who would like background on the tax reform debate will find good resources at the Congressional Research Service, many of whose reports are available through the efforts of OpenCRS.  These include:

The Center for Public Policy Priorities has a number of publications looking at the issues raised by the Rangel tax bill here.  Additionally, the The Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution has the following resources available: