Democrat vows equity in tax plan

The lead tax architect in Congress on Thursday unveiled a sweeping package of cuts and increases, which could become the blueprint for the Democrats’ initiative to overhaul the tax code and restore what party members view as fairness in the U.S. economy.

The plan would reverse the trend of the Bush administration by boosting taxes on some of the nation’s wealthiest people, including partners in private equity firms, the new kings of Wall Street. It would provide tax relief for more than 90 million households, proponents said, most of them with less than $100,000 in annual income.

It would also eliminate the alternative minimum tax, a measure designed to ensure that the rich paid at least some taxes, but which threatens millions of families -- many middle class -- with a surprise tax hike this year.

And in at least one departure from Democrat stereotypes, it would reduce the corporate income tax, a measure also recommended by the White House, and extend a range of mostly small tax breaks sought by businesses.

“We have attempted to restore equity and fairness to the system,” said Rep. Charles B. Rangel (D-N.Y.), chairman of the House Ways and Means Committee, whose plan would pay for tax relief by wiping away various provisions enjoyed by business and investment firms.

Rangel termed his plan the most comprehensive tax reform since 1986. There would be a combined $1 trillion in offsetting increases and decreases, making the proposal revenue neutral.

The new tax plan also cast in sharp relief the political dilemma of drawing a line between middle-class families that would benefit from tax relief and the more affluent, as well as the trade-off between higher taxes and economic growth.

Given all those ingredients, the Rangel proposal set off a major new debate on taxes and the economy that seemed certain to rage in the months ahead -- including within the Democratic Party -- and into the general election campaign next year.

Although President Bush’s veto power seems to stand in the way of various provisions, the plan may be offering insight into what could happen after the next election, and its political significance was illustrated by the vehemence of reaction.

Republicans blasted the plan as a job killer and repeatedly derided it as “the biggest tax increase in history.” The Bush administration wasted no time in signaling thumbs down, with Treasury Secretary Henry M. Paulson Jr. warning that it would “hinder America’s ability to compete in the global economy.”

But supporters said Rangel had come up with a powerful set of fixes for an unpopular tax code, at a time when many families felt anxiety about job security and the burden of costs for healthcare and education.

As Ways and Means chairman, Rangel, a liberal, controls the House’s official tax-writing panel, and his priorities are certain to help reshape a national debate on tax fairness after more than a decade of Republican domination that featured an emphasis on tax cuts and business-friendly tax breaks.

“It’s an incredible opportunity” to use taxes as a tool to promote fairness in the economy, said Rep. Mike Thompson (D-St. Helena), a member of the Ways and Means Committee. “I think [the plan] will provide a good juxtaposition of what we are trying to do versus what they did. They had six years of irresponsible government. This is a chance for us to turn that around.”

Although Rangel said he expected congressional action next year, some political observers said a bona fide redirection of tax policy was not likely until after the next election -- and would require a Democratic takeover of the White House.

Under the plan unveiled Thursday, tax burdens would be altered through an array of changes affecting households and businesses.

According to House staffers, more than 90 million taxpayers would have some relief, including an estimated 23 million who would not be forced to pay the alternative minimum tax.

Fewer than 2 million Americans would face a tax hike, predominantly those earning more than half a million dollars a year.

The elimination of the the alternative minimum tax, or AMT, is perhaps the most dramatic facet of the plan. The AMT was imposed in 1969 to make sure that the wealthiest Americans paid at least some tax, but it has turned into a tax increase for a growing number of taxpayers because it is not indexed for inflation.

Congress has attempted to save the middle class from falling under the AMT by passing a series of temporary fixes that raised AMT thresholds and exempted popular breaks, such as the child tax credit.

This year, all those temporary fixes are slated to expire. That would potentially make anyone earning over $75,000 vulnerable.

Rangel’s measure would also impose a surcharge on higher-income people. The most affluent taxpayers, earning at least $200,000 in adjusted gross income for couples filing joint returns, would face a new surcharge of 4%, moving up to 4.6% for those earning over $500,000.

House Speaker Nancy Pelosi (D-San Francisco) said she personally supported Rangel’s plan. But Pelosi acknowledged that a sweeping proposal to fundamentally reform the tax system would probably be debated heavily even among Democrats.

“Folks in our caucus will have the usual dynamic give-and-take on the subject,” Pelosi said.

Republicans on Capitol Hill have been gearing up to challenge Rangel’s plan, labeling it the “mother of all tax hikes” even before Rangel unveiled it. And several GOP leaders seemed eager to face off with their Democratic rivals over taxes.

“It will be an important debate that really highlights the differences between the Republican vision of innovation, competitiveness, low taxes, low burdens . . . versus one that pits Main Street against everyone else and sets up this situation of class warfare,” predicted Florida Rep. Adam H. Putnam, the No. 3 Republican in the House.

The tax plan, perhaps unintentionally, also seemed to showcase a dilemma facing Democrats who wish to cast their lot with hardworking families but run the risk of alienating more affluent constituents: Where to draw the line between the middle class and the rich?

“Essentially what they’re trying to do is raise taxes on the super-rich -- to get tax relief for the modestly rich who are getting hit by the AMT,” said Scott A. Hodge, president of the conservative Tax Foundation. He added that many households with six-figure incomes that would not view themselves as rich could face a hit by the AMT this year if Congress did not change the rules.

Although the overall debate on taxes may last a long while, lawmakers face great pressure to clarify the 2007 rules before it is too late.

Rangel on Thursday proposed to pay for a short-term AMT fix with $48 billion in tax increases affecting hedge fund managers whose income is sheltered in offshore accounts and managers of private equity funds who pay the 15% tax on capital gains, instead of the higher income tax rate.

--

jonathan.peterson@latimes.com

noam.levey@latimes.com

--

Begin text of infobox

At a glance

Highlights of the tax plan announced by Rep. Charles B. Rangel (D-N.Y.):

* Eliminates the Alternative Minimum Tax, which was implemented in 1969 to make sure that the wealthiest Americans paid at least some tax. Because it was not indexed for inflation, the tax could kick in for those earning just over $75,000 if not eliminated or amended.

* Imposes a 4% tax surcharge on households earning at least $200,000 for couples filing jointly, rising to 4.6% for those earning over $500,000.

* Cuts the top rate for the corporate income tax to 30.5% from 35%. At the same time, the plan seeks to end a range of provisions that Rangel views as loopholes but some businesses may defend.

* Increases the standard deduction, makes the Earned Income Tax Credit for the working poor more generous and increases the refundable child tax credit.

* Increases taxes for managers of private-equity funds, investment pools that often buy publicly traded companies and take them private. Executives of those funds have claimed earnings at a 15% capital gains tax rate, rather than the 35% they might otherwise pay for ordinary income.

--

Source: Times research