Saturday, October 27, 2007

Rangel's Tax "Reform"

 I spent some time looking over this tax "reform" package sent out by Mays and Means chairman Charlie Rangel (D-Harlem).  On first look, it has potential on some items but others are awful.

The good:

  1. Lowering corporate tax rates - these need to be brought in line with other economies.  However the proposal to drop from 34 to 31% is not enough.
  2. Getting rid of LIFO for inventory.  IRS has several methods for determing COSG for tax purposes.   LIFO, specifically as prescribed in the regs - is confusing, open to abuse, and doesn't always follow GAAP.  This will impact a lot of manufacturing and merchandising concerns.   There should be a phase in for these companies, and coupled with indexing corporate tax brackets - this isn't bad.
  3. Elimination of section 199 manufacturers deduction.   I still don't know why congress passed this monstrosity of a bill.  The reason they did it was due to the WTO ruling that the extraterritorial exculsion as an unfair subsidy.  Now, congress could have just lowered rates, changed the tax regime to what pretty well every other country in the world does and just tax income in the U.S. and not worlwide, but instead brought out the new manfucaturing activities deduction.  This is an excessively complex and difficult deduction to figure out for the initial benefit.  I know because I was responsible for figuring this out.    Rangel had it right that dropping rates and getting rid of this stupid and limited deduction.
  4. Getting rid of the AMT.  This is a stupid tax, and shows what happens when politicans create tax policy to target a small number of taxpayers - sooner or later it will expand to nail a significant number of taxpayers.
The Bad:
  1. Jacking up individual rates.  With his proposal to increase the top individual rate to 44% with the addition of surtaxes, this will kill a lot of small businesses who are set up as S-corporation or partnerships.   I know first hand dozens of former clients who have good job creating businesses who know will get soaked with at 25% increase in their federal taxes.  Now, the tax planning will shift back to C-corporations due to the distortions in top rates between corporations and individuals.  Stupid stupid stupid and will generate reduced economic growth (especially in the vulnerable construction industry, where the bulkof the business is in a S-corporation or partnership format).
  2. Distributive share of S-corporation income subject to self-employment taxes.   This now means that there will be a minimum a 4% and a maximum of 15% increase on earning on S-corporation earnings.  Stupid policy again.  So an S-corporation making $1,000,000 and one shareholder would have their federal tax burden go from approximately $350,000 to $440,000 due to the surtaxes on income and having it subject to self employment.  Tell me that isn't a job killer.
  3. Taxing carried interest at ordinary rates.   Another investment killer.  In the effort to go after "greedy" private equity managers, they want to change the investment definition of captial to be ordinary income.  This could have been better achieved under the regs for active trade or business, reasonable compensation, or even active trade or business.  But this proposal if expanded (and it would) could also spread out and kill the real estate sector too, which relies on carried interest to finance developments.
I agree with Rangel the tax rates should drop and all these preferences, deductions, and credits should go.  A broad base and low rates should be the goal of any well thought out tax plan.  But these proposals will distort economic activity, kill investment, and hamper economic growth.  And I haven't even factored in the expiration of the Bush tax cuts for 2010, which the Democrats salivate on not making permanent.

There is potential for reform in this bill, but there are some things that should not be passed at all.  Rangel's bill gives is telegraphing what a Deomcratic controlled congress will do with a Democrat in the white house, if you needed another reason not to vote for them.

1 comment:

Anonymous said... reveals Rangel role in that there mafia fascist casuistry
cabal, Al Smith's subantennae which hijacked recent East Europe policy,
letting them terrorists into our country. Joe Bruno opposed Iraq war since
Saddam right hand was from this cabal. Rangel arose when Tom
Boland prosecuted Adam Clayton Powell because Ike bombed Eternal Rome during
the war and aborted the Universal Concordate. They bring illegals as fifth
column which is why we must diminish their power by sending their jobs to