CHARLIE RANGEL is an old-time Harlem Democrat. His slicked-back hair, dapper suits and pocket handkerchiefs recall the age of the 77-year-old congressman’s youth. But on Thursday October 25th the chairman of the tax-writing committee in the House of Representatives showed he had a modernising side. Mr Rangel proposed an overhaul of the American tax code that he claims would simplify the collection of taxes. The bill may not be the “mother of all tax reforms” as Mr Rangel reckons. But neither is it entirely modest. It is unlikely to make it into law during the remainder of George Bush’s term as president, but it may set the terms of the debate after the election next year, especially if a Democrat is elected.
The main impetus for reform of America’s mammoth, complicated and costly tax code is the Alternative Minimum Tax (AMT). Conceived as a way of making sure that rich people did not find so many loopholes that they paid no tax at all, the AMT has begun to apply to more and more middle-income families. This is a problem for both Republican and Democrat lawmakers. For several years politicians have preferred a temporary fix rather than wholesale reform.
Mr Rangel’s bill would do away with the tax entirely—a costly change. To make up for it, he would raise taxes on couples making more than $200,000 a year. The other headline-grabbing revenue-raiser is a change in the way private-equity managers are taxed. Most of their income comes from “carried interest”, a share of a fund's profits paid to partners, and is taxed at the capital-gains rate of 15%. This is proving too tempting for revenue-raisers, especially Democratic ones: the private-equity zillionaire paying a lower rate of tax than ordinary working folk. Under Mr Rangel’s plan, carried interest would be taxed as income.
Other elements of the tax bill would include a bigger standard deduction, which would mostly help middle-class families and an expansion of the Earned Income Tax Credit, essentially a tax rebate for poorer workers. The EITC mostly goes to working single parents with children; Mr Rangel would extend it to the working poor without kids.
One part of the bill that Republicans might like is a reduction in the corporate-tax rate. America’s corporate taxes are unusually high for the rich world, at 35%. The bill proposes cutting the rate to 30.5% while closing various loopholes to make up the shortfall. But these subsidies are mainly used by American multinationals with foreign subsidiaries. Objections will be vociferous. But even Hank Paulson, Mr Bush’s treasury secretary, agrees with the idea of lowering rates while broadening the tax base.
Republicans, including Mr Paulson, have denounced other parts of the bill strenuously. Mr Rangel says the bill will raise the same amount of money as the current system, and 90m Americans will get a tax cut. But the treasury secretary says it will “hinder America’s ability to compete in the global economy”. John Boehner, the Republican leader in the House, called it “the mother of all tax hikes.” Republican presidential candidates have jumped to criticise the bill as well.
Mr Rangel has said he does not expect a vote on the bill this year. As a complete package, it is unlikely to pass before 2009 and Mr Bush would almost certainly veto it anyway. And the Senate (closely divided between the parties) is cagey.
After a new president takes office in 2009, though, the picture changes. Len Burman of the Urban Institute, a think-tank, says it may be “the baby of all tax reforms”, which could grow into an adult. A Democrat would probably support many of the ideas. Even Republicans agree that a change is needed. The AMT will not fix itself and, for all its ills, it is forcing America’s politicians to think about a long overdue revamp of the tax system.
