Which Rangel Tax Provision Affects You?

New York congressman's controversial bill frames the upcoming debate over corporate tax issues.

Rep. Charles Rangel (D-NY) hit a corporate nerve when he issued his new tax reform bill last Friday.

Since Rangel chairs the House Ways and Means Committee, the group most responsible for writing U.S. tax policy, his proposed bills are tracked closely and elicit a good deal of both criticism and support. Most groups with vested interests in the bill already have announced they will scrutinize its provisions and implications in the coming weeks.

A few, however, are weighing in early, including the trade association Financial Executives International and the U.S. Treasury Department. FEI likes Rangel’s proposal to cut the top marginal corporate income tax rate from the current 35 percent to 30.5 percent. But the group is less keen on several “revenue offset” provisions that would, for example, defer research and development deductions for U.S.-based companies and repeal the last-in, first-out (LIFO) accounting method for inventory.

The offsets, noted FEI chief executive Michael Cangemi, would hurt U.S. competitiveness in the global marketplace. “Competitiveness is the name of the game in the world economy, and all aspects of corporate tax reform should put U.S. companies on a level playing field with their foreign competitors,” Cangemi said in his official statement.

Treasury Secretary Henry Paulson vowed to oppose the bill, echoing the White House’s position. In a statement, Paulson asserted that Rangel’s “large, complex tax bill would dramatically raise taxes in ways that in my judgment would hinder America’s ability to compete in the global economy.”

To be sure, Paulson’s main thrust seemed to be promotion of the president’s alternative-minimum-tax patch, a proposal floated in February aimed at stopping an automatic tax increase that would affect individual taxpayers — mostly middle-class workers. If the 40-year-old tax rule is not adjusted by the end of the year, about 20 million middle-class taxpayers could be subject to the AMT, which would force them into the highest income tax bracket for 2008.

Paulson has called on Congress to apply the AMT patch within the next few weeks to stop the automatic increase, rather than debate the issue as part of Rangel’s larger bill.

The nonpartisan Tax Foundation noted that Rangel’s proposal to cut the corporate rate would drop the United States in the combined federal-state tax rate ranking from the second highest to fourth highest among industrialized nations. Japan has the highest tax rate of the group, at 39.5 percent, and Rangel’s proposal would put the United States behind Canada and Italy.

The Tax Foundation conceded that although the Rangel proposal may seem inadequate compared to tax cuts delivered by international trading partners, it is a signal that, “Congress is finally trying to catch the wave of corporate income tax reduction that has been sweeping the developed world for more than a decade.” The report said that five industrialized countries cut their corporate income tax rates in 2006, with eight more — including Germany — slated to decrease rates by January 1, 2008.

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