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RANGELING THE TAX REFORM BUZZ

October 29, 2007

The blogs are having their say about Congressman Rangel's "mother of all tax reforms." Greg Mankiw, the economist, notes the Tax Policy Center's distributional analysis of the proposal:

* The bottom three-fourths of households, those making less than $75,000 a year, are not much affected. They each would receive a tax cut of about $100 per year.

* The next 24 percent, those making between $75,000 and $500,000, would receive much more substantial tax cuts. Those in the $200,000 to $500,000 range, who are in the 96 to 99 percentile of the income distribution, would get a tax cut of about $3,600 per year.

* The top 1 percent, those making over $500,000, would pay substantially more in taxes. Those making more than $1 million would see their tax bill rise by an average of more than $100,000.

So the Congressman is mobilizing the Volvo drivers against the Ferrari set. It's an upper class cage match!

Tax professor Dan Shaviro likes the plan:

On the whole, I would definitely take this package over present law. Not going to happen, of course. Even apart from the lack of votes, and the Republican noise machine lying about it, it's inherently pretty hard to enact a break-even package with hundreds of billions of dollars worth of tax cuts and tax increases both, because the losers tend to screech more than the winners.

The Tax Policy Blog notes that the plan falls short as "tax reform":

The Rangel surtax does not ferret out cleverly low-paying, high-income filers. Instead, it rewards tax avoidance. Tax-exempt municipal bonds, though derided by economists as an unfair giveaway to people in the top tax bracket, will be all the more valuable. Other tax-avoidance vehicles will also thrive in the absence of the AMT and the presence of the new surtax.

But the Tax Policy Blog also says that folks shouldn't be so quick to call it a tax increase:

Regardless of whether one supports Rangel's bill or not, calling it a tax hike is somewhat dishonest . Of course it's a tax hike on some people, but it also cuts taxes for others, too. It's more of a "tax shift." Overall, the bill does not raise the average tax rate on the U.S. economy (under static scoring). The Republicans should attack the blatant tax shifting in the bill and call it class warfare rather than attack its revenue neutrality.

The new Tax Policy Center blog TaxVox says Rangel's plan is "a good start:"

Let’s start with the obvious: The tax plan rolled out today by House Ways & Means Committee Chairman Charlie Rangel (D-N.Y.) is not the “mother of all tax reforms,” the congressman’s claim notwithstanding.

However, it would do some pretty big things, such as eliminating the Alternative Minimum Tax, raising individual rates, cutting corporate rates, and slashing tax benefits for big multinationals. But it largely ducks a whole host of major issues, especially how we should tax savings vs. consumption and the tax treatment of health insurance.

Russ Fox isn't sold on the plan:

Why am I harping on this? Because of what's not mentioned in this legislation. Many of the Bush tax cuts will expire (beginning in 2009). Ask your legislators whether they will vote to extend them. The legislation introduced today implies that they're dead (at least in the view of Congressman Rangel). We're looking at a $200 Billion stealth tax increase!

Much of this legislation seems good to me. For example, I'm all for simplifying the Tax Code. However, a major issue—one which Democrats seem to ignore—is that if you increase the tax rate, the tax collected tends to decrease (the Laffer curve). This is definitely the case when this occurs on the wealthy. Indeed, because of the prevalence of S-Corporations and LLCs, much of the income of the "wealthy" is actually business income. If taxes increase on business income, business owners have far less incentive to innovate and provide additional jobs.

Prior Tax Update Coverage:

THIRD COUSIN, ONCE REMOVED, OF TAX REFORMS

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