Rangel Faces Up to Economic Reality

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Fiscal Policy: With liberal Democrats set to run Washington, you'd expect big tax-increase talk. But House Ways and Means Committee Chairman Charles Rangel doesn't want a depression with his name on it.

Three years ago, when the economy was booming under Republican governance of both the White House and Congress, veteran Harlem congressman Rangel accused President Bush of "destroying the fabric of America with a combined policy of war, tax cuts for the wealthy, and reductions in spending for domestic needs."

Now, when the Democrat-dominated 111th Congress begins in January, and Rangel resumes his chairmanship of the panel from which all tax legislation must originate, he will be dealing with a president who has promised to intensify the war in Afghanistan, reduce corporate taxes and undertake a line-by-line search for things to cut out of the federal budget.

The Congress of which he is a key leader will also be faced with the continued management of a financial crisis of historic proportions. So isn't it funny that in the midst of such a serious emergency, when congressmen are worrying about going down in the history books as the next Herbert Hoover, Sen. Smoot or Rep. Hawley, even inner-city liberals will turn to that tried-and-true economic medicine — allowing businesses to keep more of their own money.

Interviewed on Bloomberg Television's "Money and Politics," Rangel said that he would be changing the proposal he has backed for more than a year, which would have reduced the corporate tax rate to 30.5%, and will now propose to cut it even more deeply — to 28% — in line with President-elect Obama's economic agenda.

When it comes to corporate taxation, the U.S. is at a severe disadvantage to the rest of the world. The only industrialized nation with a higher marginal corporate income tax rate than America is Japan. What's more, state taxes can bring the actual marginal rate up to 39% for corporations.

Bruce Bartlett, an architect of the Reagan tax cuts and deputy assistant secretary for economic policy at the Treasury Department in the George H.W. Bush administration, noted in his 2006 book, "Impostor," that "since at least the 1930s, most economists have recognized that the corporate income tax is essentially a double tax that raises the cost of capital and has other undesirable economic effects."

As Bartlett explained it, "When income is earned by a corporation, it is taxed and then the same income is taxed again when paid out to its owners, the shareholders, in the form of dividends."

As long ago as 1992, the Treasury Department issued a study on how to integrate corporate and individual income taxes into one tax system. But Washington has never mustered the political will to accomplish the task and thus end the harmfulness of double taxation.

Rangel has proposed repealing the domestic production deduction and other tax breaks to go in hand with the corporate rate reduction. Unfortunately, the chief tax writer has also floated the idea of making private equity firms pay ordinary income taxes instead of the lower capital gains rate on the "carried interest" they charge their clients — perhaps 39.6%, if Obama gets his way on increasing the top individual tax rate, along with a possible 4% surcharge that Rangel has talked up.

That would be a fateful blunder; private equity firms are experts at taking ailing public companies, converting them to private entities in complex transactions, then performing the kind of drastic surgery needed to bring them back to health so they can return to a growth track and provide Americans with new jobs. Sticking it to those who perform this invaluable service is the last thing our economy needs in this time of crisis.

An Obama-Rangel alliance to reduce corporate taxes would be a welcome surprise for American business. If they really want to see their names engraved in gold in economic lore, however, they should set their sights higher and end double taxation by abolishing the corporate income tax and integrating the two tax systems.

That would be the kind of change that has eluded Republicans and Democrats alike for decades.

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