House Ways & Means Chair Rangel has introduced a major tax bill, the "Tax Reduction and Reform Act of 2007." Zero chance of enactment - probably zero chance of passage, but even if passed it would be vetoed by Bush - but it matters for two reasons. First, revenue-raisers in it might be used to pay for extending AMT relief. Second, all of its provisions automatically land on the shelf full of items that might be considered in the future, e.g., in 2009 under a Democratic President. (Which is not to say that Hillary or any of the others would actually take much from this bill - it would simply add to the background list of options.)
Clear discussion of the bill would be helpful but is unlikely to emerge in the political process. I gather no Democrats wanted to co-sponsor. Republicans will presumably yammer centrally furnished talking points about how it's a huge tax increase (a lie - it's a mix of tax increases and cuts), reflecting once again that they behave more like a Bolshevik-style cabal than like the type of political party one really would expect to find in a country with several centuries' worth of democratic traditions. But I am hopeful that thoughtful conservative commentators will take it seriously - there actually are parts of it that they ought to like, although they might quite reasonably dislike it on balance.
Anyway, here is a quick summary of several main features with my thoughts about them.
1) Lower-income tax reductions - The bill would cut taxes for lower-income Americans via about $86 billion (over 10 years) worth of increases to the standard deduction, earned income tax credit, and refundable child credit. This is a straight distribution issue. I'm sympathetic, but readers can evaluate it for themselves (the counter-argument is that it gives infra-marginal rate cuts that need financing via distortionary taxes).
2) AMT shuffle - interesting methodology here to try to pay for AMT repeal. Complete AMT repeal, costing $795B over 10 years, is financed by a "limitation of benefits of individual AMT repeal" provision (raising $831B). This is simply a rate increase of 4% initially, then 4.6%, on groups at income levels with a lot of AMT exposure. Amusing that the top rate gets back to exactly its pre-2001 level of 39.6%. Substantively, the idea is to raise top rates in lieu of having the AMT. Semantically, the idea is to call this a mere limitation of the benefits of AMT repeal. As a political or semantic matter, I don't think it will work. Substantive merits are mixed - getting rid of the AMT may be good but in part this amounts to higher marginal rates instead of indirectly denying state and local tax deductions. Further marginal rate increase here, although as a "bubble rate" not at the very top, from restoring the phaseout of personal exemptions. I would argue that personal exemptions are appropriate at all income levels, so the best rationale for this is an optimal income tax thing about not putting the highest rates at the very top.
3) Business, including international - Top corporate rate is cut from 35% to 30.5%. (Republicans will of course ignore this.) 90% of the revenue loss from this is offset by the revenue gain from (a) repealing the idiotic special lower tax rate for domestic production activities, (b) denying deductions related to foreign source income that is not currently taxable, until such income is actually repatriated & thus becomes taxable here, and (c) barring the use of LIFO accounting for inventories. This is a good package that almost any good-faith independent observer ought to like, with the possible exception of (b). I tend to think (b) probably is good policy - preventing what is effectively better-than-exempt treatment for foreign source income - but I feel a need to hear more about this issue from people who know more about the intimate institutional details.
One interesting effect, if you put it all together, is that marginal tax rates for individuals become much higher than for corporations if all this is enacted - 39.6%, plus more in the personal exemption phase-out range, versus 30.5%. I gather that the 15% dividend rate would be allowed to expire. Never mind, in an era when double taxation of corporate income is ever easier to avoid through sophisticated planning, this seems likely to make the corporate tax a net benefit rather than a net burden. All those economists doing incidence studies of the burden of the corporate tax (a subject I've been studying and writing about for my latest academic project) are going to have to turn around and write new papers about the incidence of the benefit from the corporate tax.
4) Other - about a gazillion one-year extenders. Not the fault of the Rangel bill, but I find it pretty unedifying to have all this stuff on regular extenders needing annual lobbying infusions to get them renewed for another year. This is a case where Congress and the lobbyists may be colluding to screw the lobbyists' clients. But again I don't lay this on Rangel or the bill - the extenders simply bring this preexisting situation to mind.
Among other features, the bill would take on carried interests, put "economic substance" in the Internal Revenue Code (which at least would stop Scalia & Thomas from saying, in any event prospectively, that there is no such doctrine), and address various little planning tricks that the staffers on Capital Hill have evidently learned about.
On the whole, I would definitely take this package over present law. Not going to happen, of course. Even apart from the lack of votes, and the Republican noise machine lying about it, it's inherently pretty hard to enact a break-even package with hundreds of billions of dollars worth of tax cuts and tax increases both, because the losers tend to screech more than the winners. Certainly a good try, in most respects, to throw out the AMT in a fiscally responsible manner and to improve the corporate tax rules through the classic combination of rate cuts and base-broadening.