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Democrats Want Fairer US Tax Code

by Leroy Baker,, New York

10 September 2007

Charles Rangel, the senior tax writer in the House of Representatives, has said that reforming the troublesome alternative minimum tax (AMT) system is central to efforts at making the US tax code more equitable. However, Rangel is also of the view that Congress must examine the tax cuts passed during the George W. Bush administrations as part of this process.

Rangel's comments, made in his opening remarks at last week's Ways and Means Committee hearings on tax fairness, mark a departure from his previous statements - since the Democrats took back control of Congress - that he would work with the Republicans on tax issues in a spirit of bi-partisanship. They set up a likely ideological clash between the two parties on tax going into next year's presidential election.

In his opening statement, Ways and Means Committee Chairman Rangel stated that:

"As most of you know, at the beginning of this new Congress, Ranking Member McCrery and I had a number of meetings to determine the issues under our jurisdiction that would lead to bipartisan cooperation. We were very conscious of the fact that there are strong policy differences within our parties that could limit our ability to work together."

"Throughout our discussions, one thing was abundantly clear: as the Committee with primary jurisdiction over revenue measures, we have a responsibility to address the problem presented by the AMT. We have had – and still have – differences of opinion on exactly how to address this problem. However, we hope that the Republican minority would feel comfortable in having input on changes and reform to the existing code, not withstanding the fact that they may not be able to support the final package. While there are some differences of opinion on which way the code should be going, we will continue to have candid discussions and work to simplify our tax laws and make them more fair and equitable for millions of taxpayers."

While most of the recent Congressional tax hearings have been somewhat narrowly focused on the tax treatment of limited partnerships, i.e. private equity and hedge funds, and whether they are paying enough tax, Thursday's panels discussed the more wide ranging question of the current structure of the US tax code, and the fairness and effectiveness of the Bush tax cuts.

"We have been driven by the AMT, but there has also been a lot of interest in the press lately about how hedge funds and partners in private equity firms are taxed. It has not been the goal of the committee to target any tax provisions other than the AMT. However, it is fair to say that since the AMT is such an expensive revenue loser – because the revenue it brings in was never expected – that naturally we have to look at the entire tax code to reach our goal of simplifying the code and ensure that the tax code instills some sense of fairness, so that taxpayers would recognize that simply having higher income does not mean a favorable rate."

While the Bush administration and Republican lawmakers argue that the two rounds of tax cuts since 2001 have led to more investment, higher economic growth and increased tax revenues, many Democrats argue that the benefits of these tax cuts have mostly gone to the wealthiest in society. The leading Democrat candidates for the 2008 presidential elections are advocating rolling back at least some of the Bush tax cuts, most of which are, in any case, temporary.

Testifying before the Ways and Means panel, Jason Furman, Director of the Hamilton Project at the Brookings Institution, a social and economic think-tank, sympathised with the Democratic view.

"Although taxes are still progressive they have done relatively little to offset the increase in inequality. As noted, since 1979 the share of before-tax income going to the top 1% has increased by 7.0% points. Absent the tax cuts from 2001 through 2004 the corresponding after-tax income share would have risen by 5.6%.... Put another way, the progressive tax code would have automatically offset 20% of the increase in before-tax inequality. The tax cuts from 2001-06, however, undid most of this automatic stabilizer," he argued.

"By themselves these tax cuts have exacerbated after-tax income disparities, thus resulting in more inequality," Furman concluded.

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