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Saturday, October 27, 2007

"Mother of all tax reforms" - Rep. Rangel

As promised, on 10/25/07, Congressman and Chair of the House Ways & Means Committee Rangel introduced the "mother of all tax reforms." Major provisions of the bill include repeal of the alternative minimum tax (AMT) for individuals after 2007. The cost of the repeal is about $800 billion over 10 years. His bill, H.R. 3970 (text, summary), pays for AMT repeal and some expansions of provisions benefiting low to middle-income taxpayers with a 4% surtax on individuals with income over $100,000 ($200,000 if married) and 4.6% for income over $250,000 ($500,000 if married).

The proposal also lowers the top corporate tax rate from 35% to 30.5% and cuts back on some preferences such as:
  • Repeals the IRC Section 199 manufacturing deduction
  • Repeals use of the lower-of-cost-or-market inventory valuation rule
  • Repeals use of LIFO inventory accounting
  • The amortizable life of intangible assets would be increased from 15 years to 20 years
  • Requires U.S. corporations to defer deductions of controlled foreign corporations until the earnings are repatriated back to the U.S. (such as paying a dividend to the U.S. parent corporation)
  • The "economic substance" court case doctrine would be added to the Internal Revenue Code

The bill was quickly denounced by many Republicans. Senator Grassley issued a press release that referred to the proposal as looking like "warmed-over AMT" because the new surtax was not indexed for inflation. (See story from CNS.)

Congress has been holding the AMT back from affecting millions of individuals with 1-year "patches" to the AMT exemption amounts. The 2007 patch though, has not yet been enacted which likely means that 2007 tax forms will be printed without it causing confusion to many individual filers (Congress is likely to enact the patch effective for just 2007 sometime before the end of the year).

Also, the tax cuts that were enacted in 2001 and 2003 expire at the end of 2010. These cuts include a 10% tax bracket for individuals, greater expensing of assets, a lower capital gains rate, and phase-out of the estate tax. The Center for Budget and Policy Priorities estimates the cost of making these cuts permanent and paying interest on increased borrowing due to increased deficit spending to be $3.5 trillion over 10 years (2008 - 2017).

We have problems:

  • The AMT was poorly designed back in 1986 because the exemption amounts and tax brackets were not indexed for inflation. Also, as more tax benefits were added to the law, such as increased child tax credits and lower rates, it caused more people to have regular tax lower than their "tentative minimum tax" with the excess being AMT which they must pay on top of their regular tax. The intent of revising the AMT in 1986 was to be sure that higher income individuals did not use lots of favorable tax rules to bring their regular tax below a minimum level. Arguably, the added tax breaks may have brought more people to low tax levels below a "minimum" level and so AMT for them may make sense. But, Congress should really give consideration to what the "minimum" level of tax should be. Also, dollar amounts in the tax law should always be adjusted for inflation to reduce problems such as we have now with the AMT.
  • The AMT is producing revenue beyond what was ever expected. However, this revenue is in budget forecasts and given current deficit spending, seems to be needed. Thus, to repeal the AMT means that Congress has gotten itself into a situation where it needs to replace the revenue (the current "paygo" rules also require this). (For more information on the AMT problem, see the Tax Policy Center website.)
  • Postponing your problems (the AMT one and the short-lived tax cuts of 2001 and 2003) usually does mean bigger problems in the future. This is true in our daily lives and in creating the tax law.

Rangel's bill isn't perfect, but it is raising issues that need discussion. I'd like to see a broader look at the tax law to see where inequities exist (such as allowing a mortgage interest deduction on two homes and on debt up to $1.1 million) to see where improvements can be made to allow for repeal of the AMT. Discussion is also needed on what Congress thinks the "minimum" level of tax is that individuals should pay. Once they have an idea of that, they can perhaps reduce some favorable provisions such as the size of the child credit or exemption amount to get to that minimum amount.

And, spending should be looked at. Why do we have such large deficits today and need AMT revenue to help reduce?

What do you think?

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