Would tax changes help or hurt you?

Hit them where they can't see it

English poet Robert Herrick remarked after the execution of King Charles I, "Kings ought to shear, not skin, their sheep." The best tax increase is one that nobody sees, and Rangel has taken that to heart. Rather than just increasing rates, he proposes to decrease deductions.

For married taxpayers filing jointly with adjusted gross incomes of $500,000 or more (or single taxpayers whose incomes exceed $250,000), he would expand the overall limit on itemized deductions and the phaseout of the deduction for personal exemptions. For those with incomes that would exceed the AMT exclusion, Rangel would also modify the 2% floor on miscellaneous deductions.

• Video: Rangel's tax bill moves forward

Currently, you can deduct only the miscellaneous deductions that exceed 2% of your adjusted gross income (AGI). For example, if your AGI is $300,000, you are allowed to deduct only the excess over $6,000.

Rangel would expand this disallowance. He would let you deduct the excess miscellaneous expenses over 2% up to up to his proposed floor of $200,000 of adjusted gross income. Above $200,000, he would increase the threshold to 5%. So with an adjusted gross income of $300,000, you couldn't have any miscellaneous deductions unless they exceeded $9,000.

Once again, the losers would be those with incomes of more than $200,000.

Family-friendly focus

Many of Rangel's constituents are New York City working-class, lower- and middle-income folks, with and without kids. They also make up a good part of the support for the Democratic Party. Their interests are going to be represented. Here's how they would be affected:

• The child tax credit for 2007 is now refundable to the extent of 15% of earned income in excess of $11,750. That number is tweaked each year for inflation, which reduces your potential credit refund. Rangel would eliminate the inflation factor and freeze the floor at $8,500.

• Rangel would also expand the number of taxpayers who could qualify for the earned-income credit. Specifically, benefits would be increased for those with no qualifying children.

• The standard deduction is taken by many who rent because without deductions for real-estate taxes or mortgage interest, it's often not worth itemizing. These are Rangel's people, and he wants to increase the standard deduction by $425 for singles, $850 for couples filing jointly and $625 for heads of households.

Show me the money!

Remember where we started -- with AMT relief. Rangel and the Democrats want to present themselves as political heroes who saved the middle class from the AMT by "repealing" the tax. But they wouldn't repeal it for everyone. Those with income high enough would be doubly slammed to pay for everybody else's tax relief.

Remember that AMT exclusion floor of $200,000. Once you exceeded it, you'd be potentially meat for the AMT. In addition, Rangel wants you to pay a "replacement tax" of 4% on income in excess of that floor up to $250,000 ($500,000 on a joint return) and 4.6% after that.

The bottom line is that Rangel is pretty much following the party line. For those with incomes of more than $200,000, he'd increase your rates and cut your deductions to pay for expanded shelter and benefits for those in the lower brackets. These are politically driven proposals, not economically based. But if you believe one of the functions of the tax code is income redistribution, you're going like what Rangel has in mind.

The Tax Policy Center of the Urban Institute and the Brookings Institution analyzed the proposal. You can see the analysis here (.pdf file). There is additional information here.

The conclusions:

• The plan would cut taxes for 99% of households.

• The top 1% of taxpayers, earning an average of $1.39 million a year, would see their average (not marginal) federal tax rate increase 2.5 percentage points to 31.6%.

• The bottom 20% would get a 1-point cut under the proposal, dropping their average rate to 2.5%. Income for the bottom 20% averages $8,477 per year.

• Those making an average of $21,600 would have a 0.6-point decrease in their average rate, to 6.9%.

• Households earning an average of $38,900 would get a 0.2-point cut and pay an average rate of 14.4%.

A note: Yes, the Republicans are thinking about taxes, too. Former Sen. Fred Thompson of Tennessee and former Arkansas Gov. Mike Huckabee, both running for president, have proposed dumping the tax code in favor of a flat tax.

Thompson's proposal, released Monday, would charge a flat 10% rate on incomes of $100,000 or less for married couples filing jointly ($50,000 for singles) and 25% for incomes above that. He'd permanently extend the Bush administration's tax cuts and repeal the inheritance tax and the AMT.

Huckabee's proposal would substitute a 23% sales tax on all goods and services.

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

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