Would tax changes help or hurt you?

By Jeff Schnepper

Rep. Charles Rangel, the chairman of the House Ways and Means Committee, wants to shake up the tax code.

And though all of what the New York Democrat proposes isn't going to become law, it will frame much of the debate over taxes in the next few years, especially if the Democrats continue to control Congress and take back the White House.

Some parts of the bill will get enacted, possibly in the next month or so: extensions of breaks that limit the impact of the alternative minimum tax, or AMT; a new deduction for mortgage insurance premiums, for homes bought after 2007; and an extension of the sales-tax deduction.

But the big provisions will be part of a long debate that will erupt because so many of the breaks in the 2001 and 2003 tax laws expire in 2009 or 2010.

Here's how Rangel's proposal would work:

Relief from the AMT

This isn't a party issue. Everyone agrees the AMT is broken or makes no sense. It is a parallel tax system designed to ensure that everyone pays something, but it jacks up taxes for more and more Americans each year.

Rangel wants it to go away for taxpayers who make less than $200,000, a figure that would be adjusted annually for inflation. That's a reasonable income floor that may be modified but not battled.

For those in higher-income brackets, the AMT normally isn't a problem. The AMT rate is 26% or 28% on income that's been scrubbed of many deductions allowed under regular rules. Ordinary tax rates are as high as 35%. So the more money you make and get taxed at 35%, the less likely you're going to be hit with the AMT.

Rangel feels substantial pressure to kill the AMT. His state, a Democratic stronghold, has high state and local income taxes that can't be deducted under the AMT.

• Video: Rangel's tax bill moves forward

The real issue isn't getting rid of the AMT, however. It's really about how to replace the government's AMT revenue.

Winners under the congressman's proposal would be people earning between $100,000 and $200,000 a year. Those with substantially higher and lower incomes usually avoid the AMT.

Whacking Wall Street

Not many of Rangel's constituents work on Wall Street.

His proposal would prevent investment-fund managers from paying the lower capital-gains rates on income called carried interest, received in exchange for services rendered. That would push their rates from 15% to 35%. It would also prevent hedge-fund managers from using offshore tax havens to defer taxes on compensation for investment services.

• Talk back: What financial moves are you considering before year's end?

No winners here -- just big money being milked to fund other revenue-sucking provisions.

Personally, I consider this an equity provision that should have been passed long ago. Rangel's problem is getting it past Sen. Charles Schumer, D-N.Y., whose most important constituents work on Wall Street. It's big money versus fiscal equity here. Anyone want to place a bet?

Wall Street can afford it!

Rangel does have one proposal that's a winner for everybody (except maybe crooks).

Rangel wants mandatory cost-basis reporting for brokers dealing with publicly traded securities. Brokers already report sales revenue when securities are sold. Under Rangel's proposal, they'd have to record and report the buy side, too.

Anyone who is honest should like this one. Your accountant would love it. It would apply to all stocks bought after Jan. 1, 2009.

How many losers would there be here? The provision would mean a lot more people would pay taxes on capital gains, and that would boost tax revenue by $4.2 billion over 10 years.

Continued: Hit them where they can't see it

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