House Ways and Means Chairman Charlie Rangel's "mother of all tax reforms" idea may be one of the most important pieces of legislation ever proposed that simultaneously has no chance of being passed. Pushing through a bill that dramatically reworks the leviathan and labyrinthine tax code—killing the alternative minimum tax, adding a surtax to incomes of $150,000 or more, raising capital-gains taxes, cutting corporate taxes but eliminating some corporate tax breaks—would be a monumental task in any year. But 12 months before a presidential election? Herculean.
Yet as political analyst Alec Phillips of Goldman Sachs stressed in a note to clients: "[The bill] is important because it signals the possible direction of tax reform efforts in 2009 if Democrats control both the White House and Congress." And that change in direction could mark a critical inflection point in American economic policy. Keep in mind what former Bush economic adviser Lawrence Lindsey told me in a recent chat: "Until very recently, there had been a growing bipartisan consensus...that you cannot run a high-tax [economic] regime and be competitive."
Rangel's plan threatens to explode that consensus. Here's why: Once you get done adding up Rangel's new taxes and then tack on the expiration of the 2001 and 2003 Bush tax cuts, "we're back up to a 50 percent top marginal rate," Lindsey calculates. That's just what it was after the first round of Reagan tax cuts in the 1980s. But wait, there's more. If you eliminate the income cap on Social Security taxes, as some Democrats have proposed, Lindsey explains that "then we're at 60 percent." In other words, Reaganomics—which was more or less de facto ratified by Clintonomics—could be repealed to a great extent.
To be sure, Lindsey, who now advises presidential candidate Fred Thompson and while at Harvard University wrote a fascinating book about the Reagan tax cuts called The Growth Experiment, is a partisan. He jokes that Democrats are planning to run the "Shrinkage Experiment." But then he makes a serious point: "We have a tax system that assumes America is the only game in town, while [other nations] are aggressively using their tax system" to boost their own economies. If the Rangel plan were passed and the Bush tax cuts were left to expire, the Tax Foundation notes, the United States would have the seventh-highest individual income tax rate in the developed world. It currently ranks 21st. Moreover, Rangel's proposal to cut the federal corporate tax rate from 35 percent to 30.5 percent would still leave America with the fourth-highest corporate taxes internationally, instead of the second-highest.
Look, this month marks the 25th anniversary of the beginning of an economic expansion, broken up only by a pair of short, shallow recessions, that has seen the U.S. economy nearly triple in size. America's $14 trillion economy is also the world's most competitive, according to a new analysis by the World Economic Forum (the Davos group).
Now maybe tax policy had little to do with all that. Deregulation, increased global trade, and a successful Federal Reserve fight against inflation have all played major roles in the long boom. Plus, it's easy to obsess over what government does. As economist Jason Furman of the liberal Brookings Institution argues, "The most important source of growth is growth in the underlying productivity of the economy. That is not something policymakers have a huge amount to say on. It really depends on the ingenuity of American entrepreneurs and businesses." A Democratic sweep a year from now, and we'll begin to find out if he—and Rangel—are right.
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