Charlie Rangel's tax plan

Representative Rangel has proposed his ideas for what he calls tax reforms to make the burden more fair so that he can get rid of the AMT which was originally proposed to tax the wealthy who might have avoided taxes with other deductions but is now threatening the middle class. Unsurprisingly, the Wall Street Journal is not impressed.

With one very revealing exception. Mr. Rangel does propose to cut the corporate tax rate, of all things, to 30.5% from 35% today. He'd "pay" for this by reducing business credits and deductions. This is revealing because it is a tacit admission that tax rates really do matter to investment choices.

Mr. Rangel has apparently been listening to the numerous American CEOs and economists who've been saying that the high U.S. corporate tax rate has been driving ever more of their business and capital offshore. Corporate tax rates have been falling even in Europe, and the U.S. now finds itself with nearly the highest rate in the developed world. So at least regarding corporate taxes, Mr. Rangel is an honorary supply-sider.

Yet when it comes to individuals, Mr. Rangel seems to think that he can raise rates and no one will behave differently. Thus he proposes to raise taxes on business and the upper-middle class in order to reduce the Alternative Minimum Tax (AMT) that Democrats created to soak the rich but is now threatening to skewer the middle class.

....But where Mr. Rangel really gets busy is with his plan for a long-term "revenue neutral" AMT fix. He wants to abolish the AMT permanently and greatly expand "refundable tax credits" for low income families, while adding a 4% income tax surcharge on anyone who makes more than $200,000 a year, or 4.6% if you make $500,000 ($250,000 for singles). Mr. Rangel also wants to raise the capital gains tax rate to 19.6% from 15% today, and raise taxes on dividends, business partnerships, and companies with foreign subsidiaries. Add it all up and you get new taxes of $1 trillion or more.

All of this is done in the name of tax "fairness," but it's hard to see how this would make the U.S. code more equitable. Millions of those who'd receive the tax credits already pay no income tax, so they would merely be getting another government subsidy. The group that gets slammed hardest is the entrepreneurial class. Tax Foundation data show that three of four taxpayers in the highest income tax bracket are small business owners or farmers. If Mr. Rangel's plan ever becomes law, look for millions of Americans and small-businesses to "incorporate" themselves so they can pay the lower corporate rate. Previous tax reforms have tried to keep the corporate and top income tax rates equal precisely to avoid this kind of tax gaming.