The Mother of All Tax Reforms?

Charlie Rangel, one of the Democrats' top taxwriters, has unveiled his plans for restructuring America's tax code. Dubbed "The mother of all tax reforms" by the Congressman from New York, Rangel's proposal effectively raises taxes in some areas while reducing them in others. Contrary to what Rangel's shameless self-promotion might suggest, this new proposal only slightly tweaks the convoluted tax code.

From this week's Economist:

If Mr. Rangel's vision shapes the tax agenda after 2008...it will represent a missed opportunity. That is because America's next president and Congress will have the best chance for reform since Ronald Reagan to an axe to the tax code in 1986.

This is a keen appraisal of the approaching situation America will find itself in. With the expiration of the Bush tax cuts (due to occur in 2010) and the rise of the Alternative Minimum Tax (which ensures that wealthy Americans cannot avoid taxation by escaping behind the code's myriad deductions), change will inevitably occur in tax policy and the common perception of it. So what plan are Rangel and the Democrats proposing? This particularly insightful Economist article continues:

Mr. Rangel...wants to eliminate the AMT [Alternative Minimum Tax], at a cost of some $800 billion over the next decade, and pay for this by levying a surcharge on rich Americans, particularly those earning over $500,000 a year. Getting rid of the AMT will indeed make the tax code simpler. But raising the top marginal rate will blunt incentives. If the Bush tax cuts are allowed to expire, America's top rate of income tax could rise to almost 45%, up from 35% today, with state taxes on top of that.

So why should we undertake such a risk? Rangel recites the rote party line that raising taxes on the wealthiest Americans while cutting taxes on the poorer classes will shrink the margin between the rich and the poor. But is this worth inflicting damage to incentives at the top?

Rangel could have proposed progressive reforms that simultaneously simplify the code. Deductions, worth several hundred billion dollars per year, ultimately narrow the tax base, with benefits flowing disproportionately to the richest taxpayers. Perhaps Rangel could have addressed this issue to subsidize his AMT repeal.

Rangel's plan does have a positive aspect, namely that he plans to cut America's rate of corporate income tax from 35% to 30%. This revenue would allow for the abolishment of several deductions, such as a tax credit for American manufacturers. In this regard, Rangel's plan is a step in the right direction, an attempt to do something that Democrats have long refused to do. But, as the Economist says, "Too bad he couldn't muster the courage to do the same in the rest of the bill."