Tax Reform

House Ways and Means Committee Chairman Charles Rangel has proposed a tax reform bill, which the GOP immediately denounced as a big tax hike.

Maybe however, it would be better for the GOP to take a good look at the bill. The bill is being touted as a reform of the Alternative Minimum Tax paid for by a surtax on the highest incomes. I personally am not that worked up about the AMT (despite having to pay it 3 out of the past 4 years). The AMT really acts as a back door flat tax and addresses the myriad of tax preferences in the code (such as the deduction of state and local taxes -- I live in a high tax city in a relatively high tax state but think people would care more about local taxes if this subsidy was repealed).

However, Rangel is looking at something which you would think is anathema on the left -- namely, lowering the corporate tax rate. Think about that. A very liberal Democrat from Harlem is proposing to use money from tax reform to partially reduce corporate income taxes.

Corporate income is really taxed twice, at the corporate level and when dividends are paid. Most of the other industrialized countries have a system whereby corporate income is taxed only once. Further, the US taxes corporations on their world wide income while in other countries, especially those with a value added tax, give relief on foreign earned income. If I had my druthers, I would replace the current two step corporate tax with a corporate level tax which is credited to dividend recipients. That would still tax corporate income paid to tax-exempt and foreign owners while taxing corporate income only once.

Given the politics, there will not be a major tax reform bill passed next year (though you may see some stopgap AMT relief. There is an election on and President Bush has no political capital left. But historically, there have been major tax reform packages in the first year of the last few presidents. And if Charles Rangel has placed the corporate income on the table, that means a chance of real reform of the tax system is possible,

Let's not reject this out of hand.