House Ways and Means chairman Charlie Rangel is once again jeopardizing legislation that would reduce the incidence of the alternative minimum tax (AMT), holding it hostage to growth-crippling tax hikes. He bragged last week that when it comes to tax hikes, he and House Democrats are “sticking to [their] guns.” If he succeeds, he’s got enough bullets to take down taxpayers and the U. S. economy.
The AMT was never intended to apply to millions of middle-class families when it was put into action back in 1969. It was originally targeted at just 155 families who paid little or no income tax. Poorly designed, and not indexed for inflation, the AMT is now poised to elevate tax bills for as many as 26 million Americans. Most fiscal conservatives believe the AMT should be repealed outright, thus correcting a multi-decade policy mistake. But at the very least an AMT escalation should not be allowed to occur.
Many Democrats, led by Rangel, think otherwise. In their opinion, if an AMT tax hike is to be stopped, another tax hike — or several tax hikes — must be enacted.
Rangel’s ransom is steep. To begin, he is proposing a carried-interest tax, a bad idea that was thoroughly discredited when he advanced it last year.
The carried-interest tax, at a rate of 35 percent, would apply to gains realized by general partners in investment partnerships, which include real-estate funds, venture-capital funds, oil and gas trusts, hedge funds, and private-equity funds. This tax-hike bullet would tear a hole through the U.S. economy, sending risk capital offshore at a time when our markets are starved for it. It also would act as a first step toward raising the capital-gains tax for everyone, a policy move that many Democrats, including standard-bearer Barack Obama, now openly advocate.
Under current law, investment partners pay taxes on income based on the type of income earned. If ordinary income, they pay ordinary income-tax rates. If capital income, they pay capital-gains tax rates. Currently, the capital-gains tax rate is lower than applicable income-tax rates.
By way of Rangel’s bill, however, investment partnerships would pay full ordinary income-tax rates on capital-gains income, even if that income is from the sale of corporate stock. This goes against the rationale for having a separate capital-gains rate in the first place. A lower capital-gains rate alleviates the double taxation of corporate source income and avoids taxing inflationary gains. It also encourages capital formation, entrepreneurship, and investment.
Now is a particularly bad time to wallop such risk-taking. Financial markets are still dealing with the consequences of the housing collapse, and capital formation remains impaired.
Rangel also is taking aim at energy producers. With gas prices over $4 a gallon, this is pretty reckless gunplay. By denying large integrated energy companies a deduction for domestic oil production, Rangel would effectively raise the corporate income tax on that production from 31.85 percent to 35 percent. This tax hike risks discouraging oil production at home, making us even more reliant on imported oil. At the same time it would exacerbate prices at the pump only that much more.
Finally, Rangel reportedly will ask for “basis reporting,” which would act like a major new financial-market tax hike. Basis reporting would require brokerages and other financial-services firms to calculate and report capital-gains basis information — or how much investors pay for securities with adjustments for splits and mergers — to the IRS. This is a costly burden to place on a U.S. financial-services sector that already is badly beaten down.
Taken together, Rangel’s proposed tax hikes are an effort to compensate for federal revenue lost in the event the AMT is prevented from applying to millions of middle-class families. The good news is that we’ve seen this story before, and it had a happy ending. Last year Rangel and his tax-hiking House allies ultimately conceded to a clean AMT bill without tax hikes. The U.S. economy will dodge some major bullets if the same happens this year.