DEMS PLAN TRILLION DOLLAR TAX BILL!!!!! IS THIS COOL WITH YOU?

The trillion dollar tax fight
By: Lisa Lerer
October 11, 2007 08:27 AM EST

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 fiscal fortunetellers fall into four categories: Robin Hoods, Goldilockses, Chicken Littles and Scarecrows.

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.

Repealing the AMT would reduce federal tax revenue by more than $800 billion over the next 10 years — and that’s assuming the Bush tax cuts expire in 2010. With the tax cuts in place, the costs would near $1 trillion.

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.

Over the past 38 years, the AMT spiraled far beyond its initial targets. By 2017, it is estimated that the tax would hit at least one-third of all 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.”

The Goldilocks path wouldn’t be easy for Rangel. After all, the more industries you tax, the more enemies you make in the process.

The current debate over the so-called carried interest bill, argue the Goldilockses, is a preview of the kinds of fights to come. The bill, sponsored by Reps. Sander M. Levin (D-Mich.) and Rangel, would more than double the taxes paid by investment managers, and it has drawn the vocal opposition of much of the business community.

Academics estimate the bill would raise anywhere from $3 billion to $10 billion. (The Joint Tax Committee has yet to release a calculation.)

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.

Above all, Republicans fear that Rangel will drum up dollars by raising the 15 percent capital gains tax rate. The 1986 tax reform package raised the rate to 28 percent, the highest in more than 50 years. Since then, the rate has been lowered during both the Clinton and the current Bush administrations.

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.

A small but growing group of Chicken Little-style predictors are churning fears with cataclysmic claims about Rangel’s intentions. “We are looking at the remainder of the year to be ground zero for the tax fight of all tax fights,” said Rep. Eric Cantor (R-Va.). “This tax hike is going to hit the American people, businesses and investors who are, quite frankly, relying on this Congress to be fiscally prudent.”

Finally, there are the world-weary voices of the Scarecrows, who offer the sort of thoughtful analysis of perilous predicaments that calmed the character’s fellow travelers in Oz. The tax sky isn’t really falling, they say, and it’s highly unlikely Rangel will get much done before the end of the session. Rather, he’s simply setting the stage for a longer battle.

“What can I do?” asked R. Bruce Josten, executive vice president of government affairs at the Chamber of Commerce. “I can’t flail around town at every little comment or breath or utterance he makes.”

Both the administration and Senate Finance Committee Chairman Max Baucus (D-Mont.) support a one-year fix of the AMT. “What we need to get done and can get done is a patch that can fix the AMT,” Treasury Secretary Henry Paulson said in a private meeting with reporters last month.

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.

“A lot of time was involved in the 1986 effort,” Burman said. “It took a couple years of work and required strong support from the president. You really need bipartisan support.”

With a veto-loving president and a stymied Congress, that sounds about as likely to happen as a fairy tale.