Michael  Franc

In July, the Treasury Department released a study cataloguing the ways our deplorable tax code restricts U.S. competitiveness. "Our tax system,” it said, “disrupts and distorts a vast array of business and investment decisions" that "lowers the productive capacity of the economy and reduces living standards." Ultimately, Treasury Secretary Hank Paulson explained, “our workers pay the price.”

Paulson wants lawmakers on Capitol Hill to follow the lead of other industrialized nations and lower U.S. corporate tax rates. He also advocates pruning the corporate code of “complex, targeted provisions; depreciation schedules without clear rationale; taxation of capital income that discourages saving and investment; and, double taxation of corporate profits that can lead to misallocation of capital.” Why? According to the Tax Foundation, the top U.S. corporate rate of 39.3% (the combined federal and state rate) is second only to Japan’s 39.5% top rate. This decades-old trend accelerated in 2006 when five large industrialized countries cut their corporate income tax rates further; eight more, including Germany, plan to do so by January.

Paulson’s message must have reached Rep. Charles Rangel (D-N.Y.), who chairs the tax-writing House Ways and Means Committee, but apparently, it only penetrated the supply side of his brain. Last week he unveiled an ambitious, but schizophrenic, tax-reform plan that is downright Reaganesque (for the most part) on corporate taxation, but succumbs to the siren song of class warfare on individual taxation.

Rangel targets “unfairness” in the tax code, especially the Alternative Minimum Tax (AMT). Created in 1969, Congress enacted the AMT to extract tax payments from wealthy individuals who were using legal deductions to avoid all income tax liability. The AMT cancels many popular tax deductions for high-income filers.

But, because Congress didn’t index the AMT to inflation, it has begun to ensnare more and more unsuspecting taxpayers. Last year, it hit 4 million; by 2010, one in three taxpayers could be paying this “millionaires” tax.

Rangel is right: The AMT must go.

But when tax policy threatens to disrupt the oxygen supply of the modern welfare state, liberals don their boxing gloves. This accidental tax, after all, will accidentally raise close to $1 trillion over the next decade. Liberals won’t return those dollars to the taxpayers without a fight.

Michael Franc

A long-time veteran of Washington policymaking, Mike Franc oversees Heritage's outreach to members of the U.S. House and Senate and their staffs.

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