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The Trillion Dollar Tax Fight

By now, everyone knows Rep. Charles B. Rangel is poised to introduce the "mother" of all tax reforms, the biggest and most expensive tax code overhaul since 1986. But what they don’t know is how the New York Democrat plans to pay the more than $1 trillion price tag — and that uncertainty is fueling rampant speculation from Capitol Hill to K Street. 

The classic Washington guessing game is frustrating anxious corporate lobbyists but amusing others, including the House Ways and Means Committee chairman who started it all. "It is surprising how nervous people get when I use the words ‘fairness’ and ‘equity’ to describe our efforts to simplify the tax code and encourage economic investment," the New York Democrat told Politico. 

The Robin Hoods predict Rangel will increase taxes on the very rich and expand breaks for the poor. Rangel’s most talked-about goal is to eradicate the alternative minimum tax, expected to hit 23 million high- and middle-income families this year

Robin Hoods expect Rangel to swap the AMT for a new tax targeted exclusively at the highest-income payers. One often-mentioned idea, proposed by Leonard Burman, director of the Urban Institute’s Tax Policy Center, would impose a 4 percent surcharge on unmarried taxpayers making more than $100,000 a year and couples making more than $200,000. 

Robin Hoods expect Rangel to swap the AMT for a new tax targeted exclusively at the highest-income payers. One often-mentioned idea, proposed by Leonard Burman, director of the Urban Institute’s Tax Policy Center, would impose a 4 percent surcharge on unmarried taxpayers making more than $100,000 a year and couples making more than $200,000. 

The 4 percent tax proposal is more progressive than the AMT, Burman said, as it would place more of the tax burden on the wealthy. Almost 58 percent of the tax would be paid by taxpayers with incomes over $1 million. Under the current AMT law, the same group will pay only 8 percent of the AMT in 2010 — again, assuming the expiration of the Bush tax cuts. 

Burman’s idea carries more than a whiff of irony. The AMT was originally designed to increase taxes on high-income individuals. When it was first passed in 1969 — a year before Rangel came to Congress — it targeted 155 high-income taxpayers.

Burman says his proposal would raise enough money to finance a complete repeal of the AMT, but, he cautions, it is not without political peril. "The advantage is that only high-income people pay the tax," he said. "The disadvantage is that some people are going to be paying more taxes and aren’t going to be very happy about it." 

That’s the reason another group — the Goldilockses — anticipates a slightly different landscape. This group predicts that Rangel will cobble funding together through a set of tax code tweaks. The Goldilockses say he’ll try closing different variations of the so-called tax loopholes until he finds the politically palatable mix that’s "just right," as Goldilocks once said. 

"There are a lot of problems with the code, so there’s a lot that would have to get moved around to make it work," says Cristina Begona Martin Firvida, director of government affairs for the National Women’s Law Center. "We’re assuming that they’re thinking of moving a lot of pieces." 

 Another, albeit unlikely, tweak would involve reducing or even eliminating deductions for state and local taxes. The idea was proposed in the final report of President Bush’s Advisory Panel on Federal Tax Reform, put out in November 2005. 

This change most likely would benefit rich taxpayers who are more likely to itemize deductions, Burman said. But those in lower income brackets would be loath to lose any type of deduction, as well — a feeling they’d certainly share with their congressmen.

Firvida and others mention an economic substance law, an idea proposed by Rep. Lloyd Doggett (D-Texas). The law would crack down on companies using shelters solely to avoid taxes. A similar idea is under consideration by the Senate Finance Committee, which estimates the law would raise roughly $10 billion.

Democrats in Congress have been relatively quiet on the issue, but Democratic presidential hopefuls John Edwards and Sen. Barack Obama (D-Ill.) have supported the increase on the campaign trail.

In the House, Rangel would be waging an uphill fight to win over both Republicans and fiscally conservative "Blue Dog" Democrats. And next year, of course, the elections will steal the stage.

read the full article at: http://www.politico.com/news/stories/1007/6250.html