Tax Reform?

By Ryan J. Donmoyer

Sept. 7 (Bloomberg) -- House Ways and Means Committee Chairman Charles Rangel said he would introduce an overhaul of the tax code that would repeal the alternative minimum tax, reduce payments for as many as 90 million U.S. households and increase levies on hedge-fund and private-equity executives.

``It's going to be sold as the mother all reforms,'' Rangel, a New York Democrat, told reporters today. He said the cost would be offset in part by allowing many of President George W. Bush's tax cuts to expire and requiring executives of hedge funds and private-equity partnerships to pay at higher rates.

Rangel said his proposal would be the biggest overhaul of the U.S. tax code since 1986. The package would increase the $1,000 per child tax credit, expand the earned income-tax credit for working families near the poverty line, and boost the standard deduction, currently $10,300, so more Americans can claim it instead of itemizing their deductions. About two-thirds of Americans currently claim the standard deduction, according to Internal Revenue Service data.

Rangel said the changes would cost between $75 billion and $100 billion over 10 years, in addition to the $800 billion required to repeal the minimum tax. The legislation, he said, would result in a ``real simplified, fairer system.''

`Loopholes'

To find the revenue, he said he would close ``loopholes'' in the tax code, including the ability of executives at hedge funds and private-equity firms to pay the 15 percent capital- gains rate on the share of profits they earn for managing investors' money. The plan would require the managers to pay taxes at rates as high as 35 percent.

Rangel said his legislation would repeal the alternative minimum tax, and he dismissed reports earlier this year that Democrats would leave the levy in place for high-income Americans. ``It is the goal of this committee to eliminate the AMT completely,'' Rangel said.

Rangel said earlier this year that he would ``rearrange the rates'' to pay for wiping out the minimum tax, suggesting he may increase taxes on upper-income households without raising the top marginal rate of 35 percent set by Bush and a Republican- controlled Congress. That could be accomplished by limiting deductions or by lowering the threshold of income subject to the top rate, which was $336,550 in 2006.

Minimum Tax

The alternative minimum tax was created as a parallel tax system in 1966 to prevent 155 wealthy people from avoiding taxes through excessive exemptions, credits and other deductions. Because it wasn't indexed for inflation, the tax increasingly affects people with more modest incomes by denying deductions such as personal exemptions, property taxes and medical expenses.

Unless Congress acts, the minimum tax will gradually impose $1.35 trillion in additional taxes on U.S. households over the next decade, including as many as 23 million families this year. Congress and the administration have limited the tax's reach to about 4 million households annually with a series of temporary measures indexing it for inflation.

To eliminate that minimum tax, Rangel will have to persuade Senate Finance Committee Chairman Max Baucus. Baucus, a Montana Democrat, has sponsored legislation to repeal the tax, though he has said more recently that budget constraints may force lawmakers to renew a temporary measure that expires this year that shields about 23 million people from the levy.