Charlie Rangel: America's Richest Need to Pay Their Share

Here's the first thing you need to know about the sweeping new tax reform plan that one of the most pivotal lawmakers in Congress, Charlie Rangel, announced last week: The total package has no chance of becoming law in what's left of this year -- or next year either.

But Rangel's proposals, even so, really do matter. His tax package represents the most specific attempt yet by a significant Democrat to lay out a post-George W. Bush tax future.

What's Rep. Rangel, a veteran 77-year-old congressman from New York, proposing for that future?

Here's what the tax plan that Rangel announced last week won't do: The plan won't "increase taxes on working families by a staggering $1.3 trillion," the bizarre charge that Missouri's Roy Blunt, the second most powerful Republican in the House of Representatives, leveled Thursday.

Unless, that is, your definition of "working families" includes private equity fund managers making hundreds of millions of dollars a year.

These somewhat atypical "working" families would pay more in taxes, perhaps as early as next year, if the first piece of the Rangel plan gets through Congress and past the White House.

Rangel's plan more or less breaks downinto three distinct pieces. The first, essentially a temporary fix, would limit the number of households subject to the alternative minimum tax, the parallel tax code originally created to stop rich families from evading taxes.

This "AMT" has morphed, since its 1969 creation, into a tax that jacks up tax bills on mostly upper middle class families. Last year, the AMT affected 3.5 million households.

That number could jump by 21 million households this year, with each paying an average $2,000 more in taxes, unless Congress takes action before the IRS prints up the 2007 tax return forms.

Rangel's plan earmarks enough money to roll back any AMT "surge" in 2007 -- and raises that money by plugging the "carried interest" loophole that lets private equity and hedge fund managers annually avoid billions of dollars in taxes.

Under Rangel's proposal, hedge fund kingpins would also have to start paying taxes on income they stash into offshore accounts.

The second piece of the Rangel plan-- a piece that he won't move for a vote until next year -- would abolish the AMT outright. To offset the lost AMT revenue, Rangel is proposing a "surcharge" on high incomes, an additional 4 percent tax on incomes over $200,000 and an extra 4.6 percent on incomes over $500,000.

These surcharges would hike the top tax rate that affluent taxpayers pay on ordinary income to 39.6 percent and the top rate on dividends and long-term capital gains -- the income from the sale of stocks and bonds, for instance -- from 15 to 19.6 percent.

Families at the middle and lower end of the income ladder, in the meantime, would see their taxes fall under the Rangel plan, largely through an increase in the standard deduction.

The third piece of Rangel's plan addresses corporate taxes. Rangel wants to slice the top corporate tax rate from 35 to 30.5 percent -- and end the loopholes that, under current law, have lowered the actual average tax rate on corporate profits to the mid 20 percent range.

Will all these changes, taken together, leave the United States less unequal? To a limited extent, yes. Rangel's changes would essentially offset most of the tax breaks for the rich that the Bush administration plopped into the tax code in 2001 and 2003.

But a straight undoing of these rich people-friendly tax cuts, a Brookings Institution report noted earlier this year, only negates about one sixth of the rise in U.S. inequality since 1979.

Rangel's plan, in sum, amounts to a modest first step down the road to a more equitable United States. That could be good -- because all great journeys start with single steps. But that could be bad as well, if lawmakers -- and Presidential candidates -- end up treating Rangel's plan as the most, not the least, that could reasonably be achieved.