The Mother of All Tax Reforms

Ways and Means Chairman Charlie Rangel has proposed a bill dubbed "the mother of all tax reforms." It includes repeal of the AMT, a substantial increase in the top marginal tax rate on individual incomes, and a cut in the corporate tax rate.

Jason Furman has nice things to say about it:

The centerpiece of the corporate tax reform is a reduction of the corporate tax rate from 35 percent to 30.5 percent, hardly living up to columnist Robert Novak's warning that Rangel would be unveiling "the most radical left-wing tax revision in half a century." Without adding to the deficit burden, this rate reduction would be fully paid for by a series of measures to broaden the corporate tax base to ensure that different forms of investments are taxed at similar rates. The biggest of these steps is a repeal of a special deduction for manufacturing businesses that was enacted in 2004 over the nearly universal objection of tax experts who warned that the government should not be tilting the playing field in favor of certain types of businesses. (Note that at the new 30.5 percent corporate rate manufacturing companies would still be paying lower tax rates than they are today.)

Alan Viard is more skeptical:

On the corporate side: that is the one part of the bill I thought was going to support the general notion of lowering the rate and broadening the base. It certainly fell short of my expectations. Base broadening is not an end in itself: we want to broaden the base by eliminating ineffective preferences, where some things are getting better treatment than competing activities. Some stuff in the bill does do that. But some stuff does not make sense from an economic efficiency perspective.

The one thing that jumped out at me was the repeal of LIFO . All studies we have of effective tax rates show even with a significant fraction of inventory getting LIFO treatment they are being taxed more heavily than equipment or structures. It encourages firms to hold more equipment and less inventory, it distorts the choices of firms. The bill would aggravate the differences. It’s a significant increase in the tax burden on inventory. The whole notion of this approach to corporate tax reform is you’ll have more of a level playing field across investments. But this provision takes the stuff already being taxed more than everything else and piles more burdens on it.

Another bad provision: the bill would increase the tax on intercorporate dividends, where one corporation holds stock in another corporation [except] if it’s like a wholly owned subsidiary. That makes no sense. It says the tax burden on investment will depend on how many corporate layers there happens to be. There’s no rational distinction, no efficiency gain, no equity gain in taxing that more heavily.

Some of the stuff in here does follow the philosophy that I was hoping to see: [repeal of] this domestic/international sales corporation which tries to promote exports, which is unsound policy. That’s just mercantilism. It’s good to see the bill scrapping that.

For those tax geeks out there who want to read more about LIFO accounting, click here. But trust me: this topic is not for the faint of heart.

Meanwhile, Scrappleface reports:

House Republicans plan to introduce a conservative alternative to the Rangel alternative to the Alternative Minimum Tax.

The GOP measure would repeal the AMT, and make up for the $65 billion in lost tax payments by levying a 4.6 percent surcharge on Americans who download alternative rock music through iTunes.

House Speaker Nancy Pelosi immediately condemned the Republican proposal because, she said, “It places an unfair burden on people who already carry the weight of the world on their shoulders."