How Democrats Plan to 'Rearrange' Your Taxes

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I'm not exactly sure what changes to the tax code New York Democrat Charles Rangel, chairman of the House Ways and Means Committee, is planning to propose to pay for a fix in the alternative minimum tax. In an interview with Bloomberg, he said Congress could "rearrange" tax rates. And here is what he told Fox News, when he asked if was going to try to roll back the Bush tax cuts:

"No, we're not talking about that, but we are–we may be talking about redirecting those tax cuts. You know, we have 23 million people in this country that have alternative minimum tax burdens, close to $1 trillion over the next 10 years, and that's not even on the president's radar screen. ... And so within the system, there can be more equity without increasing the tax burden."

Three thoughts on all of this:

1) One way to "redirect" the Bush tax cut would be to make more taxpayers pay the top 35 percent marginal rate. Another would be to limit deductions that wealthier American can take, perhaps lowering the mortgage interest deduction limit from its current $1 million level. The first idea, if it ever made its way successfully through Congress, would be a likely Bush veto target since it effectively raises marginal taxes rates. As Edward Lazear, chairman of the Council of Economic Advisers, told me late last week, "The president has said he wants to maintain his rate cuts. I don't think there's any chance he would be willing to compromise on allowing rates to go up." But the second idea, whether it's the mortgage deduction or some other deduction, is more plausible. Bush's own 2005 tax reform panel–on which Lazear served–recommended repealing the AMT but also changing the mortgage deduction to a "home credit" equal to 15 percent of mortgage interest paid, with a $412,000 top limit and ending deductibility of state and local income taxes. Here is what Lazear said when I asked generally about "revenue neutral" tax reform where AMT would be fixed in some fashion and taxes raised somewhere else to pay for it:

"Tax reform or tax changes might be something I think [Bush] would consider. For example, if we moved in the direction of a more efficient tax system, there are certainly things we could do to get there. Before coming to this job, I actually spent a year as a member of his tax advisory panel. ... We talked about a number of different things in there that would move us in the direction of a more efficient and fairer tax code, and I think the president would be very anxious to do that. ... We hope that the Democrats would work with us on that. ... There is room for bipartisan work there, and hopefully we would have a shot at it."

2) Despite Rangel's comment on tax "equity," the numbers show that the top 1 percent of income earners took home a smaller share of income and paid a higher percentage in taxes in 2004 than they did back in 2000. In 2000, the top 1 percent took home 17.8 percent of income and paid 36.5 percent of taxes. In 2004, they took home 16.3 percent of income and paid 36.7 percent in taxes. And according to the Tax Foundation, the number of taxpayers who either had no income tax liability–or had none after taking advantage of the code's many credits and deductions–has surged since 2000 from 30 million to 42 million in 2004.

3) The best guess from Capitol Hill is that Congress will end up paying for AMT reform by disregarding the pay-as-you-go rules that House Democrats recently instituted. Yep, they'll merely borrow the additional $40 billion to $50 billion it will take each year to prevent the AMT from affecting millions of middle-class taxpayers.

More Carnival of the Capitalists Questions. This week, I am going to finish answering questions sent to me by contributors to the wonderful Carnival of the Capitalists, a website that collects, summarizes, and analyzes the best economic and business blogging on the Web. CotC founder Jay Solo asks about the future of the 2005 bankruptcy law, which made it harder for American to clear their debts. I asked policy analyst Jaret Seiberg of the Stanford Group if Congress was thinking about tweaking the law in any way now that Democrats were running the show. His response: "There is chatter about this, but at this point there isn't enough political interest for it to happen before 2008. ... It took more than a decade for Congress to enact the changes they did, and it is going to take more than a few months for Democrats to build enough support to reopen the issue and undo the bill."