Trillion-Dollar Baby

You can't say Charlie Rangel lacks for ambition. The House Ways and Means Chairman has been saying he wants to pass "the mother of all tax reforms," and even that doesn't do justice to the trillion-dollar tax baby he delivered unto Washington yesterday.

No one thinks his plan has a chance of becoming law this year, but its beauty is as a signal of Democratic intentions for 2009. In proposing what would be the largest tax increase in history, Mr. Rangel is showing the world what he wants the tax code to look like if Democrats run the entire government. None of the Presidential candidates will admit this before November 2008, but give Mr. Rangel credit for having the courage of Hillary Clinton's convictions.

The New Yorker is wily enough to realize he has to wrap this homely child in the ribbon of "tax reform," and yesterday he even invoked the memory of Ronald Reagan's 1986 reform success. If only the Gipper were still here to have fun with that one. Readers of a certain age might recall that the 1986 reform traded lower tax rates (a top rate of 28%) for fewer loopholes and deductions. Mr. Rangel's idea of reform is to raise tax rates in order to offer more deductions.

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. For next year Mr. Rangel would "patch" the AMT problem at a cost of roughly $50 billion by sticking it to Wall Street private equity firms in real estate trusts, oil and gas, and buy-out firms. We wonder if he's checked this out with Chuck Schumer, the New York Senator who has been vacuuming campaign contributions by saying he'll protect these firms from this kind of increase. They're going to want their money back.

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.

We sympathize a little with Mr. Rangel, whose bad luck has been to take over his tax chair just when the AMT is becoming the tax that ate the middle-class in the high-tax "blue" states of New York, California and New Jersey. Democrats are desperate to avoid blame for this, even as they've boxed themselves in with their "paygo" promise to offset every tax cut with a tax increase or entitlement spending cut.

Amid slow growth and a housing recession, this couldn't be a worse time to raise taxes on capital gains, dividends and small business. Democrats would be smarter to drop the tax increases and "paygo," and simply patch the AMT for another year. And if Mr. Rangel really wants to reform the tax code in 2009, he's going to have read up on what the Gipper accomplished. All he's proposed so far is a trillion-dollar bomb.