Don't write off the Rangel tax bill yet

The good pieces of Charlie Rangel's (D-NY) proposed tax overhaul bill are good, and they're good for everyone. The bad parts are bad, but they're only bad for some people, and that's the cleverness behind the plan. What's missing is also bad for everyone. Let's look (and if this isn't enough detail for you, Money's website has a pretty good run-down of the bill).

Here are the good things about the bill:

• Full elimination of the Alternative Minimum Tax, which has slowly hit more and more middle-income Americans over the past few years. This is not what the Democratic authors of the bill intended 40 years ago but, because they didn't index it for inflation, that's what happened.
• Expanded credits for low-income couples without children
• 4.5 percentage point cut in the corporate tax rate

And the negatives:

• Hits high income earners ($200,000+) with a new, additional 4% tax
• Hits hedge fund and other money managers with a change in how part of their compensation is classified, resulting in as much as a 20% additional tax on them
• Closes some corporate tax breaks (while this one is unfortunate for the companies, I'm largely ok with this one as I generally view tax breaks as subsidies that you pay to yourself)

What's missing:

• Spending cuts. The money to pay for the good things has to come from somewhere - that's the rule - which is why the tax cuts are made with tax increases. Rather than simply shuffle the tax burden, we would be better served finding places where we can cut spending. Ending earmarks is one place, but that won't help all that much. Finding some bloated federal agencies to trim down would be a good start. Not expanding SCHIP would be a good idea, too. Because here's the magic of the market - tax cuts put more money out in the economy, providing more resources for private firms to fill the gaps where government is stepping back. But I digress. The point - cut spending instead of hiking taxes.

As is the want of the out-of-power party, the Republicans will likely say this whole proposal smells like moldy goat cheese, yell, stomp around, put their fingers in their ears, and then completely fail to offer a suitable counter proposal. I'd like to suggest a different tact:

1. Admit that there are good things in this bill, particularly the AMT elimination at the corporate tax cut. Our corporate taxes are the second highest in the industrialized world, and other governments (of all political persuasions) are cutting their rates, making us less competitive. This is a big deal. The average American will understand there are good things - if you say it stinks, it looks like you don't understand the concerns of Real People. Hint - that's a bad thing.
2. Be for fairness. The good things are good because they have the potential to help everyone, but that's done at the expense of a small number of people. Congress can't, or at least shouldn't, be in the business of picking winners and losers or deciding at what point someone becomes "too rich."
3. Don't whine about the fact that Democrats will get to have elimination of the AMT as a campaign issue. A friend of mine notes that Republicans have done a terrible job of pounding on the fact that Democrats created the AMT. It was also the Democrats who prevented the GOP's attempts to eliminate the AMT in the past decade. Instead of being mad about this, just have a consistent message of "We are glad the Democrats have decided to eliminate the tax they imposed on America 40 years ago, and we are glad they are now seeing things as we have seen them for years - that this tax needs to go. Republicans are happy to once again vote for the elimination of this tax."
4. Push for compromise. Use Rangel's bill as a jumping-off point, agree on the good things, and then offer spending cuts to make up for the tax increases. Remember, my Republican friends, tax cuts alone are not an end-game - our goal is smaller government. Tax cuts are a tactic - spending cuts are real progress.

This is a monumental opportunity, and there is some urgency to it, as the Tax Foundation points out:

The IRS sends the 1040 forms to be printed on November 7, and they need to finalize the rest of the forms by November 16. If Congress doesn't do something with the AMT by then, the updated forms will not be available to taxpayers until after the filing season has started and the original incorrect forms have already been issued. As if taxpayers needed any more confusion, they will then be stuck trying to figure out which set of forms is the correct set.

I'm not so delusional as to not think, given the above comment, that Rangel's not just playing politics by saying he will end the AMT while knowing there isn't enough time to do it. It could all be disingenuous. That's ok, because market-oriented leaders can force the issue. Take up this opportunity and run with it.