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Alternative Minimum Tax Faces Chance of Repeal in Tax Code Overhaul

October 29, 2007 at 6:30 PM EST
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JIM LEHRER: Next, repealing the alternative minimum tax. Margaret Warner has that story.

MARGARET WARNER: The alternative minimum tax, or AMT, was created in 1969 to make sure the super-wealthy didn’t use tax loopholes to avoid paying their fair share. A parallel tax that cancels out many deductions, the AMT forces taxpayers to calculate two tax bills and pay the higher amount.

But it was never indexed for inflation and now, nearly 40 years later, threatens some 20 million households with higher taxes this year. Both parties have said they want to scrub it, even though it is expecting to generate $800 billion in revenue over the next decade.

Last week, Representative Charlie Rangel, chairman of the House Ways and Means Committee, unveiled a plan to eliminate the AMT and pay for it with a broad tax code overhaul. His plan includes some tax cuts, like a larger standard deduction; expansion of the earned income and child tax credits; and a reduction in the corporate tax rate from 35 percent to 30.5 percent.

And it includes tax hikes, including: a surtax on married couples earning more than $200,000; higher tax rates for hedge funds and private equity firms; and repeal of special business tax breaks, like one for profits on domestic manufacturing.

For more on the AMT and Chairman Rangel’s proposal for fixing it, we turn to Congressman Rangel and Representative James McCrery, ranking Republican on the Ways and Means Committee.

And welcome, gentlemen. Thank you for being with us.

Congressman Rangel, let’s begin with you. What is so dreadful about the AMT that both parties despise it and want to scrap it?

REP. CHARLIE RANGEL (D), New York: Well, it is just so unfair. It was not intentionally done by the Congress, certainly not before the Ways and Means Committee.

Both Jim and I agreed early on that we should not just think in terms of delaying it for another year. We should abolish it, because it’s an unfair burden on 23 million people who, because of inflation, got pushed up in this category.

The real question is, with my overall reform bill, which would of course abolish it, we cannot complete that on the floor in time to prevent the AMT from going into effect next year. So where we are right now, the House, the Senate, the Republicans and Democrats and the president, want us to temporarily at least put it off for another year.

The big battle is that most of the Republicans, I think, want to borrow the money. And we believe the democratic way to do it is to pay for what we’re doing by closing loopholes and get it behind us at least for a year.

Paying for the tax repeal

Rep. Charlie Rangel
D-New York
The only thing we all agree is that we have to remove this $60 billion tax increase off of 23 million people. We know how we want to do it; I'm waiting to hear how they intend to do it.

MARGARET WARNER: So let me make sure I understand. You're saying that, even though you unveiled this huge, big tax overhaul, really what you're focused on now is a one-year fix for the AMT, but that you want -- I think that's going to cost, what, $65 billion?

REP. CHARLIE RANGEL: Exactly.

MARGARET WARNER: You want some tax hikes to pay for it?

REP. CHARLIE RANGEL: And we know how to do it. The big issue that we're going to find is that I hear from the Senate side that they just want to borrow the money and act like this just didn't happen. And the same way President Bush borrowed the trillions of dollars for the income tax cut that he had, that they want to extend this in order to temporarily put off the alternative minimum tax.

I am not certain whether my friend, Jim McCrery, has an alternative. The president certainly hasn't given us one. The only thing we all agree is that we have to remove this $60 billion tax increase off of 23 million people. We know how we want to do it; I'm waiting to hear how they intend to do it.

MARGARET WARNER: Well, let me turn to your colleague, Congressman McCrery. Do you agree? Is that your same assessment of the situation right now, that broad tax overhaul is really not on the table immediately, but that the issue is, how do you do this one-year fix of the AMT and how or whether you pay for it?

REP. JAMES MCCRERY (R), Louisiana: I think that's right, as a practical matter. I've suggested to Chairman Rangel months ago that we should repeal the AMT, but we should do that in the context of overarching tax reform.

I don't think, unfortunately, that that's going to happen this year or next year. So we're stuck with having to do the patch on the AMT, just as we've done the last several years.

As far as I'm concerned, we can do the patch without raising taxes to, quote, "pay for it" because we're already bringing in to the federal government 18.6 percent of GDP in revenues, which is above the historical average for revenues, and we're doing that with the patch in place.

So we can leave the patch in place for another year -- in fact, another two years -- and do just fine from a revenue standpoint. Then, I hope, after the '08 elections, we can talk about overarching tax reform that will solve this problem.

Closing taxation loopholes

Rep. James McCrery
R-Louisiana
I'm not for increasing taxes to address the little bit of deficit that is left at the federal level. If we're going to address that, if we think it's an immediate concern, we ought to do it by restraining spending.

MARGARET WARNER: So you're saying, since there are increased tax revenues, rather than that apply that toward the deficit, you would apply enough of that towards making this one-year patch or fix of the AMT?

REP. JAMES MCCRERY: Well, I'm not for increasing taxes to address the little bit of deficit that is left at the federal level. If we're going to address that, if we think it's an immediate concern, we ought to do it by restraining spending. And so that's really the key difference I suppose right now between Republicans and Democrats.

MARGARET WARNER: So, Congressman Rangel, since you do want to, quote, "pay for it," but just this smaller piece, what are you proposing that would raise $65 billion?

REP. CHARLIE RANGEL: Well, we haven't really concluded exactly how we're going to do it. There's some discussion as to, if there are people that are operating equitable funds and they do a good job, why should one group get taxed at a rate of 15 percent as capital gains when they've made no investment and another firm get paid at ordinary income?

Another thing that we're looking at is that we have the ability to have people who get large sums of money for pension funds to have this taken to tax havens overseas, and there's no tax consequence of it for them. Billions of dollars are lost with all of these tax schemes.

And so Jim is right. While we both agree to do something about it, it's hard to do something about it without talking about tax reform. And so to the extent that we've found some people getting preferential treatment that they shouldn't, we would pay for the alternative minimum tax with that. But still we have a whole lot of other reforms to do in the big picture.

MARGARET WARNER: Congressman Rangel, just a quick follow-up to you, but now there are many Democrats who don't even support raising the taxes on the hedge fund managers, aren't there?

REP. CHARLIE RANGEL: Listen, every time you find a loophole, someone else is going to call it a tax incentive. And if you were lucky enough to have lobbyists convince the Congress to give you a break, you'd be fighting, whether you're a Democrat or a Republican.

The only question in this, is it fair? And if it's clearly not fair, then we should have the political guts, notwithstanding the fact that you're going to have winners and losers, are you willing to do it?

So on the question of fairness and simplicity, even in the large tax bill, people can ridicule it and say they don't want to do it, but you cannot reform a tax system without some pain, without some political consequences. So we don't have any problem with that, but we haven't heard from the president, how would he pay for it?

Adhering to pay-go rules

Rep. James McCrery
R-Louisiana
If you want to balance the budget -- which we're on the way to doing, by the way -- I think we should reduce spending or at least control spending and not increase taxes, and that's where the rub is.

MARGARET WARNER: But, Congressman McCrery, you're saying don't pay for it, that it's sort of paid for because of they're higher-than-anticipated tax revenues?

REP. JAMES MCCRERY: That's correct. We're already bringing in enough revenues to the federal government. We don't need a higher percent of GDP to come in, in the form of revenues to the federal government.

Look, if the Democratic majority insists on adhering to the pay-go rules that they have in place today, we will experience -- this country will experience a $3.5 trillion tax increase over the next 10 years, getting the percent of GDP coming into the federal government above 20 percent for one of the few times in this country's history.

I hope they don't want to do that. I hope they just haven't really analyzed the impact of their pay-go rules. And once they do, they will agree that that is not reasonable, it will inhibit economic growth and job creation.

MARGARET WARNER: OK, but we're slipping into a little jargon here about pay-go rules. Now, you're referring to the rule that the House has which is that, if you either cut taxes one place, you have to raise from another place, or if you increase spending, you have to pay for that, is that right?

REP. JAMES MCCRERY: That's how they state it, but the reality is that they are saying, if the CBO baseline anticipates a tax increase, as it does with the AMT, the application of the AMT, to 21 million additional households this year if we don't put the patch on, or the CBO baseline anticipates the expiration of existing tax provisions, then you have to replace those tax increases with another set of tax increases.

That's different from paying for a tax cut, which is how they state it all the time, but that's not the reality. The reality baseline is the tax code that exists today and sticking with the level of revenues that are coming into the federal government.

If you want to balance the budget -- which we're on the way to doing, by the way -- I think we should reduce spending or at least control spending and not increase taxes, and that's where the rub is.

Taxation in the 2002 election

Rep. Charlie Rangel
D-New York
Are you going to borrow the money in order to give this $60 billion of relief, or are you going to raise the money by inequities in the tax system and balance it out? We say: We've done enough borrowing.

MARGARET WARNER: Chairman Rangel, could I just -- because we only have time probably for one more question, so let's broaden this out. We're going into an election year. Tell me how you think this issue, both the AMT and your proposal for broader tax overhaul, is a factor in the election. Is this going to be something that's going to really be a flag that the Democrats carry?

REP. CHARLIE RANGEL: Well, it would be a good flag. It would be a great banner. It's talking about simplification and centers for economic growth. But the most important thing is talking about fairness between the disparity, in which certain people, wealthy people and those that have the lobbyists' influence.

But to get back to the AMT, the temporary problem, no matter what is said, there's only one question: Are you going to borrow the money in order to give this $60 billion of relief, or are you going to raise the money by inequities in the tax system and balance it out? We say: We've done enough borrowing.

If we knew they were this flexible in borrowing, the president should have signed the state health insurance bill for the children and just borrowed the money instead of talking about the deficit. The Republicans in this administration has never cared about the deficit. Why should they not care about it now? I think the American people will want us to pay for it.

MARGARET WARNER: Congressman McCrery, what is your sense of this as a political issue?

REP. JAMES MCCRERY: Well, I hope that tax reform is part of the debate in this country in the '08 elections, both at the presidential level and at the congressional level. I think Chairman Rangel and I agree that the current tax system is antiquated. It's too complex, it's too burdensome from a compliance standpoint and needs to be reformed.

And if we could both get together and decide what percent of GDP the federal government ought to bring in, in the form of revenue -- should it be the 18.2 percent GDP that is the historical average? Should it be a little higher, since we now have some entitlement programs that are growing and so forth? That ought to be part of the discussion.

But every one of us policymakers at the federal level ought to be debating this and discussing this in the '08 elections so that, in '09, with the AMT being even bigger than it is today, if we don't repeal it -- and I don't think we will over the next year-and-a-half -- and with all the expiring tax provisions of the 2001 and 2003 tax cuts coming together at the same time in 2010, it's the perfect time for us to discuss this, to debate it, and to agree on a new, modern tax system that, as the chairman says, will encourage economic growth, make this country more competitive in the world marketplace, and create the jobs of the future.

REP. CHARLIE RANGEL: Well, we've started the debate now. I really think the ball is in the president's court right now.