Monday, October 29, 2007

Rangel Tax Reform Proposal

Charles Rangel, the Chairman of the House Ways and Means Committee has proposed a tax reform plan (press release; Washington Post story). Although its not expected to pass this year, it may be an indication of where tax policy will go if/when there is a Democratic administration.

The plan is intended to be "revenue neutral" - the tax cuts in the plan are balanced by tax increases, so the total amount of revenue coming in stays the same. The plan would eliminate the Alternative Minimum Tax (see earlier post), and make up some of the revenue by increasing the marginal income tax rate on high earners. It would also eliminate a loophole on "carried interest" that has allowed some fund managers to treat their income as "capital gains" (thereby paying a much lower rate). The "standard deduction" - i.e. the tax deduction you get just for being you - would be increased by $425 ($850 for married couples). Modifications of the earned income tax credit and refundable child credit would benefit low-income households. As for corporations, the top corporate tax rate would be cut, but some loopholes would be closed.

The Journal's Real Time Economics blog has reactions from several economists. In the Washington Post, the Brookings Institution's Jason Furman praised the corporate tax provisions. The Tax Policy Center analyzed the distributional effects (summarized here by Mankiw).

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