Kevin Hassett on “Mother of All Tax Reforms”

October 29, 2007

The Tax Foundation has put together a first look at the impact of Congressman Rangel’s “mother of all tax reforms,” including a summary news release, a Fiscal Fact on the Rangel plan’s treatment of the corporate income tax and another Fiscal Fact looking at what will happen in 2011, when the Bush tax cuts expire, should Rangel’s bill pass.

Today, Kevin Hassett of the American Enterprise Institute weighed in:

In terms of revenue, Rangel’s reform would be the biggest tax increase in history. Compared to a baseline where President George W. Bush’s tax cuts are extended and the dreaded alternative minimum tax isn’t allowed to swallow millions of taxpayers whole, the bill raises taxes by a whopping $3.5 trillion over the next 10 years, according to the office of Representative Jim McCrery of Louisiana, the top Republican on the Ways and Means Committee.

To put that in perspective, that’s about $2 trillion more than the 10-year cost of the Bush tax cuts enacted back in 2001.

But the revenue grab isn’t the scariest part. That honor belongs to the increase in marginal tax rates, which is almost unfathomable in its scale. Rangel’s main objective is to repeal the alternative minimum tax, which was originally designed to capture taxes from wealthy individuals but over the years has taken in more and more middle-income families.

To accomplish that, and still collect the AMT revenue, he would enact a surtax on the adjusted gross incomes of wealthy taxpayers. If your family’s income is above $200,000, then your surtax is 4 percent. If it’s above $500,000, it’s 4.6 percent.

But the tax increase on the wealthy doesn’t stop there. When the Bush tax cuts expire in 2010, the top marginal rate goes back to 39.6 percent. In addition, Rangel would restore the phase-out of itemized deductions and personal exemptions that was repealed in Bush’s 2001 bill.

Adding it all up, and adjusting for the tax rate on Medicare, the Rangel bill would raise the federal marginal tax rate on incomes above $500,000 to close to 48 percent.

To put that tax rate in perspective, after adjusting for state and local income taxes, it would be about 13 percentage points higher than the average of U.S. trading partners in the Organization for Economic Cooperation and Development. And it would give the U.S. the fourth-highest combined top marginal tax rate in the OECD, behind only Denmark, Sweden and France.

Federal tax rates haven’t been as high as Rep. Rangel proposes since the mid-1980s (see table C29 in the link), when frustration with the tax system forced the tax reform of 1986. If Rangel’s plan does someday make it into law, it might be just the thing to trigger whole-scale tax reform again.


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