Friday, November 9, 2007

Who benefits and who loses from the Rangel Tax Bill

The Tax Policy Center, which is jointly run by the Urban Institute and the Brookings Institution, has analyzed H.R. 3970, Rep. Rangel's "Tax Reduction and Reform Act." Rep. Rangel's bill is a revenue-neutral proposal that would eliminate the Alternative Minimum Tax, increase the standard deduction for household tax filers, expand the Earned Income Credit for low-income families, and make the Child Tax Credit refundable. To keep the country from going further into debt, it would balance these decreases by increasing tax rates for high-income households, returning some restrictions on deductions and exemptions for high-income households, and changing the way that investment fund managers can treat their income so that their income is taxed as earnings rather than as capital gains. The bill would also simplify corporate taxes, eliminating several deductions but also lowering overall rates.

Researchers at the Tax Policy Center looked at how households in different income groups would be affected. They concluded that 57 percent of households (86 million households) would end up with lower tax bills as a result of this proposal, while only 2.4 percent of households would end up with higher bills. On average, households with annual incomes below $500,000 would pay less under Rep. Rangel's proposal, while households with higher incomes would pay more. The researchers calculated that "almost no one earning below $100,000 would receive a tax increase."

On average, the benefits would be highest--both in absolute and in percentage terms--among households with incomes between $100,000 and $500,000. Many households in this income range would gain from the elimination of the AMT; however, some other offsetting tax increases would also kick in in this range.

Among households with incomes above $500,000, about 80 percent would see a tax increase. Average payments for households with incomes between half a million and a million dollars would rise 2.2 percent, while average payments for households earning over a million dollars would rise 4.5 percent.

Math-challenged Republicans continue to criticize Rep. Rangel as proposing "the largest individual income tax increase in history." For most sensible people, that would be an odd way of describing a plan with no net revenue impact, that benefits 57 percent of households, and that leaves another 40 percent untouched. Of course, it's not so odd at all if your goal is to steer more money to America's richest and most powerful households and you have no qualms about sticking today's children with the bill.

A permanent fix to the AMT is long overdue. Given the large existing budget deficit, our ongoing military commitments, and the swelling and underfunded entitlements for the elderly, we cannot afford to put another tax cut for rich households "on the tab." Rep. Rangel's responsible plan deserves serious consideration.