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Democrats' 130% Tax Increase Hits Ethics, Political Problems

10:31 AM, Nov 8, 2007 • By BRIAN FAUGHNAN
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We've been covering the debate in Congress over how to "fix" the AMT. Ways and Means Chair Charlie Rangel has proposed a repeal that includes a tax increase of $3.5 trillion. We've also discussed how Democrats are claiming that their move to block a tax increase that was never supposed to happen justifies raising taxes by trillions to make up for the supposed loss.

Now as Democrats prepare to take up a short-term AMT patch, it turns out that the bill looks like it's been written by wealthy campaign donors. The New York Times chronicles how helpful Chairman Rangel's bill is to his campaign donors:

The chairman of the House Ways and Means Committee has proposed legislation that would effectively halt some current tax audits of people who get a tax break for living and operating a business in the United States Virgin Islands.

Many beneficiaries of the tax break are campaign contributors to the lawmaker, Representative Charles B. Rangel, Democrat of New York, according to data collected by CQ MoneyLine, which tracks political contributions.

At least one of them, Richard G. Vento, is currently under audit, according to court filings. Mr. Vento gave $4,400 last year to the Baucus-Rangel Leadership Fund, which supports Mr. Rangel and Senator Max Baucus, the Montana Democrat who heads the Senate Finance Committee.

Amazingly, Rangel's bill would protect the same wealthy businessmen Democrats have been railing against for years: those who move their corporate headquarters offshore just to evade US taxes:

The Virgin Islands tax break--an effective federal tax rate of only 3.5 percent on income earned in the islands--is tied to a program to encourage economic development there. It has existed since the 1960s, but it gained momentum over the last decade as the Virgin Islands government opened the program to services companies in an effort to attract educated, affluent workers.

Financial services companies and their executives began flocking to the islands, taking steps like contributing to local charities as ways of establishing residency, which was required to capitalize on the program's tax benefits.

The IRS became suspicious that many were spending more time running their businesses on the mainland than in the islands, and in 2003 it undertook enforcement efforts that, lawyers in the islands say, have ensnared some 100 taxpayers, not all wealthy.

It's no surprise that campaign contributions have deeply influenced the development of this bill. The Washington Post reported yesterday on the donation of hundreds of thousands of dollars to Democratic leaders and campaign committees, and how those donations were followed by policy shifts in favor of the donors.

The bill is also running into serious political problems: House Democrats are starting to realize that a vote for Rangel's proposal could cost them their seats. As we've covered before, the tax increases in Rangel's bill are very unlikely to survive the Senate. Democrats in swing seats rightfully wonder whether there's any reason to go on the record for tax increases that won't even pass the Senate. Congress Daily reports on the dissension among Democrats:

With some vulnerable Democrats facing a difficult tax vote this week, House Democratic Caucus Chairman Rahm Emanuel of Illinois has raised the prospect of taking up the alternative minimum tax patch without provisions that would raise other taxes to make up for the lost revenues.

Caucus sources said Tuesday that Emanuel made his case for breaking up Ways and Means Chairman Rangel's AMT/tax extenders bill in a recent memo to Speaker Pelosi.

Aides who have seen the memo said that while it also mentions potentially moving an extenders-only option or proceeding with the package as is, it is clear that Emanuel prefers a stand-alone AMT fix that does not tax profits, in the form of carried interest, from private equity, hedge fund, venture capital and real estate investments, as Rangel's bill would do...

"Why should House members have to walk the plank?" asked Rep. Jim Cooper, D-Tenn. "This is a 130-percent tax increase, and we know it's going nowhere in the Senate."