House Ways and Means addresses AMT and tax code simplification

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On Thursday, the House Committee on Ways and Means held a hearing on fair and equitable tax policy for America's working families. The panel focused on the current structure of our tax code and the fairness and effectiveness of the Bush tax cuts, the alternative minimum tax (AMT) and the tax treatment of hedge funds and partners in private equity firms. Ways and Means Committee Chairman Charles B. Rangel (D-NY) issued the following opening statement:

"As most of you know, at the beginning of this new Congress, Ranking Member McCrery and I had a number of meetings to determine the issues under our jurisdiction that would lead to bipartisan cooperation. We were very conscious of the fact that there are strong policy differences within our parties that could limit our ability to work together.

"Throughout our discussions, one thing was abundantly clear: as the Committee with primary jurisdiction over revenue measures, we have a responsibility to address the problem presented by the AMT. We have had - and still have - differences of opinion on exactly how to address this problem. However, we hope that the Republican minority would feel comfortable in having input on changes and reform to the existing code, notwithstanding the fact that they may not be able to support the final package. While there are some differences of opinion on which way the code should be going, we will continue to have candid discussions and work to simplify our tax laws and make them more fair and equitable for millions of taxpayers.

"We have been driven by the AMT, but there has also been a lot of interest in the press lately about how hedge funds and partners in private equity firms are taxed. It has not been the goal of the committee to target any tax provisions other than the AMT. However, it is fair to say that since the AMT is such an expensive revenue loser - because the revenue it brings in was never expected - that naturally we have to look at the entire tax code to reach our goal of simplifying the code and ensure that the tax code instills some sense of fairness, so that taxpayers would recognize that simply having higher income does not mean a favorable rate. And our overall objective should always be to improve the American economy and make it as strong and profitable as it can be."

In the morning session, focusing on the current structure of our tax code and the fairness and effectiveness of the Bush tax cuts and the Alternative Minimum Tax (AMT), the panelists described the budgetary effects of large tax cuts and how such cuts necessitate either a cut in spending or an increase taxes in order to promote economic growth.

The panelists also discussed the distribution of benefits under the Bush tax cuts. In particular, they examined how the alternative minimum tax takes back much of the promised benefits of the Bush tax cuts for working families.

Excerpts from witnesses appearing on the first panel:

On the danger of the AMT:

"Does it matter that the tax cuts threaten millions of middle-class families with the AMT? Yes. The AMT violates virtually every principle of tax policy. It is not fair: it penalizes married couples, includes nasty bracket creep, and disallows many legitimate deductions, such as certain legal fees. The AMT is inefficient: most taxpayers face higher effective marginal tax rates under the AMT than they would under the regular income tax—and that problem is getting much worse as more middle-income people become subject to the AMT. The high tax rates discourage saving and working and encourage tax avoidance. And the AMT is hideously complex. It confounds taxpayers trying to comply with the law."

- Len Burman, Director, Urban-Brookings Tax Policy Center, written testimony

On equity and fairness:

"Although taxes are still progressive they have done relatively little to offset the increase in inequality. As noted, since 1979 the share of before-tax income going to the top 1 percent has increased by 7.0 percentage points. Absent the tax cuts from 2001 through 2004 the corresponding after-tax income share would have risen by 5.6 percent. Put another way, the progressive tax code would have automatically offset 20 percent of the increase in before-tax inequality. The tax cuts from 2001-06, however, undid most of this automatic stabilizer.

"By themselves these tax cuts have exacerbated after-tax income disparities, thus resulting in more inequality."

- Jason Furman, Director, The Hamilton Project, Brookings Institution, written testimony

The second panel examined the topic of hedge fund manager compensation and certain aspects of the international tax rules. The panelists also discussed the reasons why hedge funds form outside of the United States and described ways in which the tax code could be amended to bring investment back into the United States.

On the need to change current law related to debt-financing:

"If Congress amends the unrelated debt-financed rules as suggested, tax-exempt investors will no longer be forced to invest offshore and use blocker entities to avoid the unrelated debt-financed income rules on legitimate investments."

- Suzanne McDowell, Partner, Steptoe & Johnson LLP, Washington, D.C.-based law firm, written testimony

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