Little things mean a lot

Little things mean a lot

Focusing on a $4 million provision in a $76 billion tax overhaul proposal certainly qualifies as nit-picking. Well so be it, because this particular $4 million special interest tax break is a lousy part of the tax bill put together by the House Ways and Means Committee, of which Charles B. Rangel, D-N.Y., is chairman.

There is no question that the work done by Rangel’s committee is important and that he faces enormous political challenges in removing inequities in the tax code in a way that is “revenue equal” — that is for every dollar lost in one place, one is picked up in another.

The big picture

Unless the House and Senate come up with a plan, millions of middle class households will soon being paying surcharges under the alternative minimum tax law that was passed a generation ago to address a problem that had angered Americans, the existence of loopholes that allowed the “rich” to avoid paying their fair share of taxes. Unfortunately, the AMT was not indexed for inflation, and yesterday’s rich are quickly becoming today’s middle class.

But eliminating the AMT will cost about $50 billion, and unless that $50 billion is to be added to the already unmanageable deficit and national debt, someone else’s taxes are going to have to go up while the middle class taxes go down.

Rangel’s plan would hit tax investment managers at private equity firms and hedge funds. They are are now paying 15 percent capital gains rates on their earnings, rather than the higher income tax rates that others in their tax bracket pay. It would also block hedge fund managers and other highly paid executives from using offshore tax havens to shelter income.

Rangel’s plan passed in committee on a party-line vote, but will face more opposition in the full House and in the Senate. In what may come as a surprise to some, a good number of hedge fund capitalists are Democrats, and they’ve apparently already gotten to Senate Majority Leader Harry Reid.

So the question of whether the AMT can be eliminated before it hits as many as 23 million households will have to be argued out in coming days, with both Democrats and Republicans deciding whose wrath they fear more, the hedge fund managers or the middle class.

The little ripoff

But getting back to the nitpicking. Regardless how the multibillion dollar tax issues play out, we found the $4 million loophole that Rangel inserted into the bill to be utterly repulsive. As reported by Jeffrey H. Birnbaum in the Washington Post, Rangel responded to the National Conference of State Legislatures and in particular legislators from his home state of New York by inserting a measure to allow state lawmakers to write off their state-provided per diem payments, even for days when the legislature isn’t in session. And even for legislators who don’t actually get a cash per diem payment from their states.

Rangel’s amendment was a response to the IRS cracking down on what it saw as abuses by state legislators, especially in New York.

In matters of federal tax law, $4 million is a pittance. But as a matter of principle, legislators — state or federal — should be the last people getting special tax breaks. That Rangel doesn’t see that is disturbing. Or perhaps he just thought this one would sneak through.

Well, it hasn’t. It’s out in the open. And as a matter of principle and politics, the per diem loophole should be closed by the full House.

Congressmen can argue the merits of soaking the rich or squeezing the middle class, but there should be no argument over whether state legislators should get custom-designed tax breaks. They shouldn’t.