Commentary

Taxing Our Credulity

A Page One story in the Oct. 31 Wall Street Journal said, “The scariest thing about this time of the year isn’t Halloween. It’s the chance that you’ll get ensnared by the alternative minimum tax [AMT].” Actually, the scariest thing was a “solution” to the AMT offered by Ways and Means Chairman Charles Rangel in the same paper the previous day. Mr. Rangel asserted that, “Fundamental tax reform must begin with a repeal of a tax that is now hitting middle-class families and is threatening to grab back the benefits promised under the 2001 and 2003 tax cuts.”

That was a trick, not a treat. Mr. Rangel tried to dress up as President Bush, as if he was genuinely anxious to preserve the lower tax rates enacted in 2003. In reality, the Rangel bill would repeal all of those tax cuts.

On a joint tax return, the current tax rate of 10 percent on the first $15,650 of your taxable income would jump to 15 percent under Mr. Rangel’s misnamed “Tax Reform and Reduction Act.” The 25 percent rate would climb to 28 percent, the 28 percent rae to 31 percent, the 33 percent rate to 40 percent, and the 35 percent rate to 44 percent. Yet Mr. Rangel describes these across-the board tax increases as “broad tax relief.” He even dares to compare them with Tax Reform Act of 1986, which had no tax rate higher than 28 percent.

By writing that “tax reform must begin with a repeal of a tax that is now hitting middle-class families,” he was talking about the alternative minimum tax, or AMT. This is bait-and-switch — promising candy while offering garbage in a pretty box.

The AMT was created by Democrats to limit exemptions and deductions, and was greatly increased to 26-28 percent by President Clinton. The Rangel bill likewise would limit deductions and exemptions, which amounts to a de facto AMT.

The AMT was a nuisance for 2.3 percent of us in 2006, say the Tax Policy Center of the Brookings Institution and Urban Institute (which lobbied zealously for this “reform”). But 91 percent of all AMT revenue came from the top 4 percent — those earning more than $200,000. The Rangel bill imposes higher tax rates on all taxpayers, ostensibly to get rid of the AMT but really to rationalize letting the Bush tax cuts expire in 2011. If tax rates did soar in 2011, many would be “relieved” of the AMT only because their regular taxes would be even higher, making the AMT moot.

Before that happens, the Tax Policy Center warns that 32.4 million taxpayers (20.9 percent of potential filers) might be briefly affected by the AMT in 2010 if Congress does nothing. Yet only 3 percent of the AMT would fall on those earning less than $75,000 (in 2006 dollars). The AMT is not nearly as big a threat to the middle class as repeal of the Bush tax cuts, unless “middle class” is oddly redefined to include the top 5 percent (who already pay 58.4 percent of all income tax, according to the Congressional Budget Office).

In reality, such successful two-earner couples are precisely the targets of Mr. Rangel’s surtaxes as well as larger surtaxes from Sen. Hillary Clinton to subsidize compulsory health insurance designed in Washington.

Chairman Rangel frets that “opponents will attack my reforms by labeling them a tax increase.” He claims this “ignores the tax cuts that would be provided to some 90 million Americans as well as the Joint Committee on Taxation’s determination that the bill is revenue-neutral.”

Mr. Rangel tried to dress up as President Bush, as if he was genuinely anxious to preserve the lower tax rates enacted in 2003.”

Tax cuts provided to 90 million? Compared to what? That comparison is between total repeal of the Bush tax cuts with or without some offsetting relief from the AMT, and it treats larger Earned Income Tax Credits as a “tax cut” for people who pay nothing and instead get a check. That phony choice is between two types of poison, both of which raise all tax rates from top to bottom.

The Joint Tax Committee says 42 percent of all tax returns owed nothing last year, thanks partly to the Bush tax cuts. When properly compared with current tax rates, Mr. Rangel’s bill would increase individual income taxes for virtually everyone who still pays them.

Mr. Rangel nonetheless chastises “Republican friends,” saying they “should have the courage to lay out a precise plan for how they will pay for the ongoing war in Iraq, the commitments to our veterans, much-needed improvements in our infrastructure. and investments in our health-care and education systems…. This nation must come to grips with the repercussions of recent fiscal irresponsibility.”

Didn’t he just insist his bill was “revenue neutral?” If so, how could it possibly pay for all those lavish “improvements?” He wants more taxes to pay for the war in Iraq? Didn’t his Party promise to end that war?

Repealing the AMT is a grand idea, but not at any cost.

Chairman Rangel believes “this package [of higher tax rates and a disguised AMT] should bring even the most partisan conservatives to the table for an overdue debate on the future of our nation’s tax policies.” That is a debate Mr. Rangel’s critics would welcome, but preferably a debate conducted with less trickery.

Alan Reynolds is a nationally syndicated columnist, a senior fellow with the Cato Institute and the author of Income and Wealth (Greenwood Press).