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Rangel Proposes Largest Tax Increase in American History

3:14 PM, Oct 25, 2007 • By BRIAN FAUGHNAN
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According to the Congressional Budget Office, the United States government faces a budget deficit of $343 billion from 2008-2017. With total spending over that time near $36 trillion, the projected deficit is essentially a rounding error--one that could easily be closed by trimming projected spending growth by a fraction of a percent. How do Democrats propose to close it, though?

With the largest tax increase in American history.

Chairman Rangel is touting the benefits of the plan, but Jim McCrery--the senior Republican on the House Ways and Means Committee--explains that the tax increases called for under the Rangel plan total $3.5 trillion over the next ten years.

The bill will add a 4% surtax on Americans earning more than $150,000 a year ($200,000 for couples). That is on top of the scheduled expiration of the 2001 and 2003 tax cuts. So, under Democrats' plan, over the next few years, the individual income top tax rate in the United States will rise from 35% to 44%. By way of comparison, the other 29 Organization for Economic Co-operation and Development countries - basically other developed nations - have an average top marginal tax rate of 35.7%. In fact, only five OECD countries would have higher top marginal tax rates in 2011 than the U.S. if the Democrats' bill is enacted...

Chairman Rangel will claim that these tax increases go to provide tax cuts to 90 million Americans, but he is selling pure snake-oil. Many if not most of those taxpayers are getting a purely imaginary "tax cut." Some of them are the roughly 20 million people that Republicans shielded with the Alternative Minimum Tax patch. Millions more are people who have benefited from the 2001 and 2003 tax cuts, and only get "tax cuts" if you assume that the 10% bracket, marriage penalty, and $1,000 per child tax credit will expire. Others, like single people who will now be eligible for the Earned Income Tax Credit, are getting a tax refund from the government even though they don't actually pay income taxes...

That's right. $3.5 trillion. The baseline that the Democrats are using for "paygo" includes revenue from an "un-patched" AMT and from the tax increases that occur when the 2001 and 2003 tax laws expire after 2010. Together they total $3.5 trillion over ten years. If we play by the Democrats "paygo" rules, that is the size of the tax increase we are imposing on the American people. That will hurt our nation's competitiveness and cost us American jobs. The Rangel bill is the first step down a road none of us want to follow, and I urge you to oppose it strongly.

The frustrating aspect of the Democratic plan is that it purports to raise taxes to make up for revenues lost to tax cuts. But the federal government never intended to collect these revenues in the first place. The AMT was intended to ensure that a few hundred of the wealthiest Americans did not escape taxation entirely. The Democratic argument is that by correcting the error that would have caused the AMT to unintentionally touch millions of taxpayers, they are giving those taxpayers a tax cut.

Think of this analogy: suppose Democrats in Congress announced that they were going to raise the taxes of middle-income workers by a trillion, but then repealed the increase before it took effect. Would you count yourself the beneficiary of a tax cut? Under Rangel's plan, that's exactly what you are.

Take it a step further though. Suppose that in order to cancel the planned tax increase, Democrats announced that they needed to 'make up the lost revenue' elsewhere. That's what House Democrats are proposing here.

The House Republican Study Committee has set out an alternative to the Rangel plan, which doesn't use the AMT as an opportunity to raise taxes. They explain it here.

Also note that while Rangel is claiming that his plan offers a tax reduction for many businesses, it took the National Association of Manufacturers only a few hours of review to grow suspicious:

While the package includes some tax relief supported by the NAM, including corporate tax rate cuts, we are extremely concerned about the tax increases that will impact manufacturers of all sizes. Based on our initial review, for many manufacturers, the proposed tax increases could well exceed the benefits of the proposed tax relief.