AMT: Mother of All Tax Bills and Progeny

On Oct. 25, after a gestation period of nearly nine months, House Ways and Means Committee Chair Charles Rangel (D-NY) finally unveiled the Tax Reduction and Reform Act of 2007 (H.R. 3970), his self-described "mother of all tax bills." The Rangel bill is a $930 billion, multi-faceted tax reform package that seeks to abolish the Alternative Minimum Tax (AMT) on a revenue-neutral basis. The measure redistributes the tax burden away from lower- and middle-class taxpayers and toward the wealthy beneficiaries of the Bush tax cuts of 2001 and 2003. Congressional action on the AMT is urgent. The Bush tax cuts increased the number of people subject to the AMT and the exemptions used under the AMT have not been indexed for inflation. As a result, 23 million taxpayers, up from the current 4.2 million, will have to pay the AMT when they file their 2007 taxes if Congress does not enact a hold-harmless patch freezing the number of Americans paying the AMT before the end of the year. The Rangel plan's central feature is the permanent repeal the AMT at a ten-year cost of $845 billion. It should be noted this estimate assumes current law — namely the Bush tax cuts — expires. If those tax cuts were extended, AMT repeal cost would nearly double to about $1.5 trillion over ten years. The plan also calls for a $48 billion increase in the standard deduction and a $30 billion expansion of the Earned Income Tax Credit for childless workers. These proposals are paid for mainly by scaling back the Bush tax cuts (the plan would impose a "surtax" of 4.0-4.6 percent for those earning over $200,000 a year), bringing in $832 billion over ten years. It also restores some phase-outs of deductions for the wealthy that would add $29 billion, eliminates the so-called "carried interest" tax loophole for fund managers ($26 billion), and closes another loophole for offshore deferred compensation for hedge fund managers ($23 billion). On the business side, Rangel's plan reduces the corporate tax rate from 35 to 30.5 percent, at a ten-year cost of $364 billion. The bill pays for this decrease by ending a raft of corporate tax deductions, from elimination of the domestic manufacturing deduction (adding $115 billion in revenue) to ending the "last-in, first-out" (LIFO) accounting practice ($107 billion), to deferring deduction of unrepatriated income ($106 billion), and other provisions ($71 billion). A knee-jerk reaction from Republicans to the Rangel plan came swiftly after it was introduced. Vice President Dick Cheney immediately called it a bad proposal filled with "terrible ideas" that would do "an awful lot of damage" to the economy. House Minority Leader John Boehner (R-OH) wrongly criticized the plan as "the largest tax increase ever proposed on the American people." Some of the opposition to the plan may exist because the plan has a redistributive impact, which means it helps the vast majority of American taxpayers. In the aggregate, it amounts to a modest tax cut for 99 percent of Americans. According to the nonpartisan Tax Policy Center, the plan would trim average federal tax rates by 0.2-1.4 percent for 99 percent of taxpayers in 2008. To pay for this reduction, the top 2.4 percent of taxpayers would pay more in taxes in 2008 should the Rangel plan be enacted. In sum, the major components of the legislation would provide a net tax reduction for 2008; the average tax cut across all households would be $81. Most observers recognize the Rangel tax bill is fairer than the current tax code. The larger standard deduction and tax credits for low-income workers are paid for by scaling back the excessive Bush tax cuts for the wealthiest people. In addition, it achieves one of the president's goals of tax reform by simplifying the tax code. It repeals the complex AMT and removes many of the code's largest deductions and loopholes. Significantly, the bill is compliant with the congressional pay-as-you-go (PAYGO) rules and shifts no costs onto the national credit card by requiring additional borrowing. On Nov. 1, the Ways and Means Committee approved the Rangel bill's short-term provisions, H.R. 3996, the Temporary Tax Relief Act of 2007. This legislation consists of an increase in the exemptions from the AMT that keep additional taxpayers from having to pay that tax, as well as a one-year extension of popular tax credits and deductions such as the research and development credit, state and local taxes deduction, and teacher supply deduction, among others. To pay for this, H.R. 3996 changes tax provisions for companies and other financial enterprises by closing the carried interest tax loophole, disallowing deferred foreign income, delaying worldwide allocation of interest, and other provisions. A House vote on the bill is expected on Nov. 8 or 9, with party-line approval likely. After House approval, the next step would be the Senate, where a pitched battle is expected over adherence to fiscally responsible PAYGO principles. President Bush has already threatened to veto an AMT patch bill that is fully offset, and the thin majority in the Senate could easily abandon PAYGO principles unless members supporting fiscal responsibility make a stand to not add to the national debt. While no floor action is expected during the remainder of 2007 on the larger, comprehensive Rangel bill, it could become the frame of reference for the next major tax reform effort, perhaps early in the next presidential administration. The Bush administration has abandoned any plans to propose or enact comprehensive tax reform — a fact not lost on Rangel. In a letter to Treasury Secretary Paulson dated Nov. 2, Rangel urged the administration to show leadership on tax reform, saying that merely criticizing the House plan is not enough to enact reforms. "President Bush has been in office for nearly eight years and yet we have received no bill, no suggestions, and no direction. It is easy to be critical, but if not this bill, what would the administration recommend that we pursue to meet these goals?"
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