Democrats unveil sweeping tax reforms

Date: Friday, October 26, 2007
Author: Andrew Ward & Eoin Callan, FT.com

Democrats on Thursday unveiled proposals for the most sweeping reform of the US tax system in two decades, promising relief for middle-class families and a reduction in corporate rates.

The plan would be funded in part by an estimated $48bn tax increase on private equity and hedge fund managers, according to legislation introduced on Thursday by Charles Rangel, chairman of the House of Representatives tax-writing committee.

Democratic lawmakers said the proposals would result in 90m people paying less to the government, without reducing overall revenues.

ut Republicans warned that the measures would depress growth and destroy jobs by increasing taxes on millions of high-income households and small businesses.

Tax policy is expected to be among the most fiercely-contested issues in next year's congressional and presidential elections, with Republicans running on a low-tax platform while Democrats focus on making the system fairer.

Mr Rangel's proposals would more than double the rate of tax on so-called carried interest - one of the main sources of income for executives at private equity and hedge fund companies - and require hedge fund managers to pay tax on income deferred to offshore accounts.

Hedge funds and buy-out companies have come under increasing political scrutiny from Democrats on Capitol Hill and the presidential campaign trail this year, amid unease about their surging profits and growing economic power.

Both parties acknowledge tax reform is urgently required to prevent up to 23m households from the alternative minimum tax (AMT), which was originally aimed at high-earners but is widening its reach because it was not indexed to inflation.

Mr Rangel said he planned to push stop-gap measures this year to provide relief to those threatened by the AMT before pursuing broader reforms, including repeal of the AMT and reduction of corporate taxes, next year.

Under the proposals, US corporate tax rates would fall to 30.5 per cent from 35 per cent, paid for by scrapping various tax breaks for businesses.

Mr Rangel said he had been convinced by Hank Paulson, treasury secretary, that US corporate taxes were higher than in many rival economies and needed cutting to make the US more competitive.

Mr Paulson on Thursday acknowledged Mr Rangel's efforts to reform the corporate tax system but voiced opposition to his proposal to increase taxes on individuals earning more than $150,000 a year. "As our economy grapples with a housing downturn, the last thing we need is a tax increase," he said.

Republicans said the proposed legislation, combined with Democratic plans to allow the Bush administration's 2001 and 2003 tax cuts to expire, would amount to the biggest tax increase in US history.

"If this plan were to become law, the effective top marginal tax rate in this country would be the same as it is in Germany," said Roy Blunt, House Republican whip. "When you adopt European-style tax rates, European-style growth rates can't be far behind."