Rangel tax overhaul plan (2007)

House Ways and Means Committee Chairman Charles Rangel (D-N.Y.) unveiled a broad tax policy proposal on October 25, 2007. The bill is unlikely to be debated or voted on before 2008. According to the Joint Tax Committee it would not change the amount of revenue collected, but would alter existing law to short $1 trillion of the tax burden over ten years. Rangel called it “the mother of all reforms.”

Bill summary
One part of the bill is a surtax of four percentage points on married couples with adjusted gross income of over $200,000 and a 4.4 percentage point surtax for couples with over $500,000 in income. The bill would also tax the managers of hedge funds and private equity firms’ earnings at ordinary income tax rates, which at the time was over double the capital gains rate they paid. Hedge fund operators would also lose their ability to defer income taxes through the use of offshore havens. Corporations would face several tax increases, but also some relief, according to the tax plan. Manufacturers, U.S. companies with foreign subsidiaries and oil companies, retailers, wholesalers, and other industries that use the last-in, first-out accounting method would have their taxes increased. However, such a measure would reduce the top corporate tax rate from 35 percent to 30.5 percent.

Rangel’s bill would also expand those who qualify for the earned income tax credit, increase the size of the refundable child credit, and increase the standard deduction, allowing more families with low incomes to not pay the income tax. These changes would have a negligible effect on tax revenue because those with very low incomes contribute little to the overall government tax revenue.

Rangel did not give details of another tax bill he said he would push to a vote soon, which would alter the alternative minimum tax (AMT) so that it would not affect middle-income taxpayers in 2007. He said he would “patch” the AMT in 2007 and extend several tax breaks set to expire at the end of the year. Originally designed to prevent the “super-rich” from using loopholes to avoid tax liability, it later threatened to increase the tax burden on about 21 million taxpayers lower on the economic ladder.

Reaction
Clint Stretch, a managing principal for tax policy at the accounting firm Deloitte & Touche, said the bill would shift the tax burdens from middle and upper-middle-class taxpayers to high-income individuals. The Ranking member on the committee, Jim McCrery (R-La.) said the plan was "the largest individual income tax increase in history." Treasure Secretary Henry Paulson said the bill "would hinder America’s ability to compete in the global economy." Rangel explained the bill as an attempt “to restore fairness and equity to the system.”

Virgin Islands provision
A provision by Chairman Rangel in the bill limited to three years the time the IRS could go back and audit individuals it suspected had been falsely claiming to meet residency requirements for the U.S. Virgin Islands. The provision, part of a larger bill intended to address the alternative minimum tax, could lose $38 million over 10 years for the U.S. Treasury, according to the nonpartisan Joint Committee on Taxation. Under law, Americans who maintained a primary residence in the Virgin Islands, run a local business and spend 183 days a year there qualified for a low tax rate of only 3.5 percent on income earned in the islands.

At the time the bill was pending IRS audits could reach back over three years, partially because the agency did not consider that the statute of limitations had begun to run until after tax returns were filed with the government. Many who claimed residence in the Virgin Islands filed their returns with the Virgin Islands government and had to refile with the IRS.

A spokesman for Rangel (D-N.Y.) called it a "fundamental matter of fairness." However, Senate Finance Committee ranking member Charles Grassley (R-Iowa) said “Congress rarely takes action that affects outgoing IRS audits, so it’s striking that House leaders are proposing changes in the statute of limitations for U.S. taxpayers who are newly claiming residency in the Virgin Islands." He added “It raises questions of tax fairness” and "whether or not these filers are simply seeking a tax shelter."

According to CQ Moneyline, which tracks political contributions, many beneficiaries of the provision were contributors to Rangel. One contributor under audit, Richard G. Vento, gave $4,400 to the Baucus-Rangel Leadership Fund, which supports Rangel and Senator Max Baucus (D-Mont.), chairman of the Senate Finance Committee. Other beneficiaries of the provision, money managers Michael W. Masters and Richard H. Driehaus, contributed over half of the $51,900 that residents from the Virgin Islands contributed in 2006 to Rangel for Congress, Rangel’s campaign organization. As of November 2007 one beneficiary of the tax break pleaded guilty to tax fraud and four others were indicted.

External articles

 * Jeffrey H. Bimbaum, "Democrat Proposes Overhaul of Taxes," The Washington Post, October 26, 2007.
 * Alison Fitzgerald, "Republicans Welcome Rangel's Tax Bill as Election-Year `Gift,'" Bloomberg News, October 26, 2007.
 * Andrew Ward and Eoin Callan, "Democrats unveil sweeping tax reforms," MSNBC, October 26, 2007.
 * Sarah Lueck, Rangel's Corporate-Tax Bill May Frame Future Debate," The Wall Street Journal, October 23, 2007.
 * Alison Fitzgerald and Ryan J. Donmoyer, "Wall Street Lobbyists Move Quickly to Stifle Rangel Tax Plans," Bloomberg News, October 22, 2007.
 * Jeffrey H Bimbaum, “Bill Would Limit IRS’s Reach in Virgin Islands,” The Washington Post,” November 7, 2007.
 * Stephanie Strom, "Tax Proposal From Rangel Could benefit His Donors," The New York Times, November 8, 2007.