The car tax has been in the news recently in Connecticut and Virginia, the only two states that levy it. It’s important to distinguish this tax, which is a property tax on actual cars, from a sales tax that affects the...
- Tax Foundation Offers a First Look at the Rangel Tax Reform Legisla...
Tax Foundation Offers a First Look at the Rangel Tax Reform Legislation
Contact: Nate Bailey (202) 464-5102 or firstname.lastname@example.org
WASHINGTON - The Tax Foundation has begun dissecting Ways and Means Chairman Charlie Rangel's tax reform legislation. While more detailed studies will be forthcoming, here are some initial thoughts on various components of the Rangel bill:
Top Combined Income Tax Rate Would Climb Over 50%, World's 7th Highest
For the first time since the Tax Reform Act of 1986, the top combined (federal and state) marginal tax rate on individual income would climb above 50 percent under the Rangel plan. When the rate reaches that peak in 2011 with the expiration of the 2001 tax cuts, the U.S. will have the 7th highest individual income tax rate in the developed world. The U.S. currently ranks 21st in that comparison.
Corporate Tax Cuts Would Move U.S. From World's Second-Highest to Fourth-Highest Rate
Chairman Rangel's proposal to cut the U.S. federal corporate tax rate from 35% to 30.5% would make the U.S. combined federal-state rate fourth-highest internationally, instead of second-highest, where it stands right now. The average OECD corporate tax rate, U.S. excluded, is 28.1%. In the OECD, only Japan's 39.5% rate is higher than the U.S. rate right now. The U.S. would leapfrog only Italy and Canada under Rangel's proposal.
Corporate Tax Cuts Important to Economy, U.S. Global Competitiveness
Although this proposed cut may seem inadequate after what our international trading partners have done, nevertheless Congress is finally trying to catch the wave of corporate income tax reduction that has been sweeping the developed world for more than a decade. Five countries in the Organization for Economic Cooperation and Development (OECD) cut their corporate income tax rates in 2006, and eight more, including Germany, will have cut their rates by January 1, 2008. Canada's Liberal Party leader committed this week to corporate rate cuts. Germany is one of several countries that had higher tax rates than the U.S. in 2000 but will have a lower rate than the U.S. in 2008, even if the Rangel cut is enacted.
Standard Deduction Increase Would Amount for $127 Savings for Typical Family
Most taxpayers who take the standard deduction instead of itemizing are in the 15% tax bracket, so the $850 increase in a married couple's standard deduction would save them 15% of $850, or $127. Similarly, the extra $425 deduction for a single filer would save $64, and the extra $625 deduction for a head-of-household would save $94.
AMT Repeal's Impact Depends Largely on Future of Bush Tax Cuts
For 2007, Rangel extends the AMT relief that has been given to taxpayers over the past few years-a one-year patch that puts in place the 2006 AMT exemption amounts. But starting in tax year 2008, Rangel's bill would completely repeal the AMT. In total, these AMT relief provisions would cost the treasury about $843 billion over the next 10 years, according to the bill's scoring. This estimate of the cost of AMT relief is much lower for the latter part of the ten-year window because the expiration of the Bush tax cuts would raise regular tax liabilities so much that the AMT would have a much smaller impact relative to the regular individual income tax in tax years 2008 through 2010. Most people would be paying higher taxes as a result of the Bush tax cuts' expiration, but they would not be paying the AMT. On the flip side, if the Bush tax cuts were extended (which depends largely upon the 2008 elections), the cost of repealing the AMT would be much greater.
EITC, Refundable Child Credit Changes Increase Redistribution in Tax System
Expanding the standard deduction does nothing for the 43 million tax returns that already pay nothing, so Rangel included some provisions to benefit tax filers at the bottom of the income scale, including an increase of the Earned Income Tax Credit (EITC) and an expansion of the refundable tax credit. Both of these credits are refundable, meaning that they can be paid back to the taxpayer even if that taxpayer doesn't pay any income tax.
EITC and the child tax credits grew by 58 percent from 2000 to 2005 in nominal terms. This means that they have already outpaced the growth of most government programs designed to provide assistance to low-income individuals.
Rangel "Reform" Bill Doesn't Really Reform Much at All
While Rep/ Rangel may consider this a significant tax reform package, on the individual side of the tax code, it is not truly what most tax experts would consider tax reform. Most true tax reform consists of broadening the tax base in order to lower rates. Rangel does achieve this principle on the corporate side, but it is not realized on the individual side. At the end of the day, the scheduled expiration of the 2001 Bush tax cuts is the 800-pound guerilla in the room. They interact heavily with almost all of Rep. Rangel's proposals, and they dramatically impact the tax liabilities of American families.
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