updated 10/25/2007 12:15:47 PM ET 2007-10-25T16:15:47

The House's top Democratic tax writer on Thursday unveiled a $1 trillion plan to repeal the alternative minimum tax and lower the tax burden of most lower- and middle-income people.

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The proposal would be paid for by requiring the wealthy and some corporations and investors to pay more.

In laying out the plan that would effectively rewrite many of the tax policies put in place under Republican control of Congress, Rep. Charles Rangel of New York said the changes would bring a net tax reduction to almost all families with incomes under $500,000 and that some 91 million families would receive tax relief.

"We have attempted to restore equity and fairness to the system," Rangel said.

The package, introduced by the Ways and Means Committee chairman at a news conference, includes a one-year temporary fix to shield middle-income families who might get hit by the alternative minimum tax and several dozen extensions of specific tax credits now available to teachers, veterans, those with education expenses and others.

The more far-reaching changes in the tax code will probably not come up for a vote in the House until next year, but Democratic leaders have indicated they will move quickly on the stopgap AMT measure and the extensions. Rangel acknowledged difference with the Senate on finding ways to pay for the fix, but he said that 23 million people - one estimate of taxpayers who may be affected by AMT this year - are "going to drive us to provide relief, that's for sure."

'Tax increase' and 'Snake oil'?
Republicans quickly voiced strong opposition to the long-term plan. "This is the largest individual income tax increase in history," Rep. Jim McCrery of Louisiana, Rangel's low-key GOP counterpart on the committee, wrote fellow Republicans. Rangel, he said, "is selling pure snake oil."

Republicans in recent days have prodded Democrats to act on the AMT issue. Treasury Secretary Henry Paulson on Tuesday warned in a letter to Congress that failure to pass an AMT fix soon would expose 21 million taxpayers to the tax, with an average tax increase of $2,000.

The AMT was created in 1969 to ensure that a very small number of wealthy people couldn't use tax breaks or deductions to eliminate their entire tax liability. But the tax was not indexed to inflation, and every year more people are exposed to it. Nearly 4 million taxpayers were subject to the AMT in 2006, and the number is expected to multiply in 2007.

The Rangel proposal would extend for one year the current-law AMT relief for nonrefundable personal credits, at an estimated cost of $47 billion over 10 years.

The permanent repeal of the tax would cost nearly $800 billion over 10 years. That would be offset by applying a replacement tax of 4 percent of married couple income above a certain level, not to be less than $200,000. The tax would be 4.6 percent on income in excess of $500,000, or $250,000 in the case of a single taxpayer. High-income individuals would see a limitation on itemized deductions and a phase-out of deductions for personal exemptions, raising $29 billion over 10 years.

In anticipation of Rangel's plan, Rep. Jeb Hensarling, R-Texas, and other GOP conservatives wrote their colleagues Wednesday urging them to oppose any proposal to raise taxes to pay for the elimination of the AMT. "The correction of tax mistakes should never be offset with tax increases," they wrote.

Democrats are committed to pay-as-you-go rules requiring that ways be found to pay for any spending increases or tax cuts so as not to add to the federal deficit.

Proposal's other provisions
The bill also reduces the top corporate marginal tax rate from 35 percent to 30.5 percent, at a cost of $364 billion over 10 years. This would be paid for in part through such measures as repealing the domestic production activities deduction and requiring that U.S. corporations that defer income through controlled foreign corporations also defer the deductions that are associated with this income. The last-in-first-out accounting method would also be eliminated, saving $106 billion over 10 years.

Under the Rangel plan (with costs and new revenues over a 10-year period):

  • Married couples filing jointly would be entitled to take an additional $850 as a standard deduction, at a cost of $48 billion.
  • The number of lower-income taxpayers qualifying for earned income credit would grow, at a cost of $29 billion.
  • The refundable child credit would be increased, at a cost of $9 billion.
  • Investment fund managers would be prevented from paying taxes at capital gains rates, raising $26 billion.
  • Hedge fund managers would be prevented from using offshore tax haven corporations to defer taxes on compensation received for providing investment services, raising $23 billion.
  • There would be mandatory cost basis reporting by brokers for transactions involving publicly traded securities, raising $4 billion.

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