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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, October 30, 2007

Dueling WSJ Op-Eds on Rangel Tax Plan

Fundamental tax reform must begin with a repeal of a tax that is now hitting middle-class families and is threatening to grab back the benefits promised under the 2001 and 2003 tax cuts. I'm talking about the AMT, and I've just introduced legislation to strike it from the tax code before it ensnares millions of middle-class Americans. ...

My proposal meets the president's goal of a "revenue-neutral" reform and more. My legislation would repeal the AMT, so that taxpayers will no longer have to fill out multiple tax forms, or wonder year after year whether they will be hit. My reforms would also provide economic security to taxpayers. They would allow millions of additional families to access the $1,000 child tax credit, raise the standard deduction, and expand access to the earned-income tax credit so that working adults will not face tax liability before reaching the poverty level. In total, the bill provides increased tax benefits to more than 90 million families. This is meaningful tax relief for those who need it most.

Tax reform will not be achieved overnight. However, this package should bring even the most partisan conservatives to the table for an overdue debate on the future of our nation's tax policies. This nation must come to grips with the repercussions of recent fiscal irresponsibility.

Opponents will attack my reforms by labeling them a tax increase. This false rhetoric ignores the tax cuts that would be provided to some 90 million Americans as well as the Joint Committee on Taxation's Determination that the bill is revenue-neutral. Some of my Republican friends have even suggested financing of tax reform with a round of tax cuts that are not paid-for. Supporters of this approach should have the courage to lay out a precise plan for how they will pay for the ongoing war in Iraq, the commitments to our veterans, much-needed improvements in our infrastructure. and investments in our health-care and education systems.

The introduction of my bill marks the start, not the end, of the legislative process. Tax reform requires painful choices and my bill reflects that reality. But those who would attack my bill without suggesting alternatives are in the posture of defending the status quo, a posture that is outside the mainstream desires of the American people and the bulk of the business community.

Nobel Peace laureate Al Gore believes global warming is "an inconvenient truth." Here are some economic truths that America's liberal leadership finds too inconvenient to support.

Tax rate reductions increase tax revenues. ... Federal tax revenues have been rising between 6.7% and 14.5% in each of the past three years, but the proposed tax increases, by slowing rather than stimulating the economy, would ensure that these percentages decline. ... [T]he Rangel bill shows in which direction tax policy will proceed if there is a Democratic president and Congress in 2009.

A much more interesting approach was introduced in the House three weeks ago by Rep. Paul Ryan, a Wisconsin Republican: elimination of the AMT, extension of the 15% capital gains and dividend rates that expire in 2010, and giving taxpayers a choice between filing under the current tax system or a new option with just two income tax brackets, 10% for joint filers with incomes less than $100,000 and 25% for those with higher incomes. It includes a $25,000 standard deduction plus a $3,500-a-person exemption, which comes to $39,000 for a family of four. The new option would be a flat-tax choice, with no other exemptions or loopholes, and the AMT would be gone.

Every taxpayer would be able to make a choice between the current tax system with the AMT burden, tax rates from 10% to 35%, and many complex deduction options, or the Taxpayer Choice Act. Mr. Ryan estimates that the federal government's revenues--excluding AMT revenues, the elimination of which would cost the government only about 2.4% of revenues over 10 years--would be about the same as under the current system, and the top 5% and 1% of taxpayers would pay slightly higher taxes than they do today.

Such a system would stimulate the economy, increase economic growth and job opportunities, and simplify a very complex and frustrating current tax system. But for the liberal establishment a flat tax with lower rates would be a very inconvenient truth. Much better in their view are the substantial Rangel tax increases.

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I wish the taxpayers here could avoid paying tax on their "rebates" but I see no way legally to do it -- even if Jordan's figures out a way to avoid sending 1099s. It is pretty clear when they bought their furniture they really bought the furniture and what pro gamblers call a "futures contract." Just like a non-gambling futures contract, it has a termination date which is the date of elimination (causing a gambling loss) or WS victory (win).

The Red Sox Future has now paid off and the customers, in my mind, have a gambling win equal to the purchase price of the furniture. They can offset the win with gambling losses, but otherwise, they gotta pay.

That is uninteresting. What I DO find interesting is Jordan's tax position. I think it is VERY clear they were running an illegal lottery (the elements of payment, chance and prize are all there). The illegality of the lottery does not affect the patrons' tax position but it DOES affect Jordan's position. I would disallow the deduction for the (illegal)gambling expense. The interesting question is whether to disallow the "insurance premium" (which I think was probably placed with a book in Costa Rica because I know of know respectable insurance company that would insure such an event plus the "premium" would probably be lower at a book because they have offsetting risks and they don't have to charge an "ignorance premium" because their "actuaries" do this kind of work every day) or the payment of the winnings to the customers. I do not think you can fairly deny both -- but I think the IRS could if they wanted to. If they want to teach Jordan's a small lesson (and enforce the illegal business deduction rules), they would only disallow the premium. If they want to teach a really big lesson, they could disallow the deduction to distribute the winnings to the customers. I'd allow the premium deduction (even if placed in possibly illegal transaction with a book in Costa Rica) because I have no problem with a firm taking any business risk they see as profitable and it really was an advertising expense. Also, it is not clear that it is illegal (especially in Costa Rica where the book, if used, is legal).

The real problem is the distribution of the $30M to the customers. That is definitely illegal under Mass. law and I think the IRS could easily disallow that deduction as an illegal business expense. I'd find for the IRS and I am very liberal about just treating gambling like any other business -- where it is legal. But I hope I am wrong. (Jordan's only hope is to claim that illegal lottery laws are not "generally enforced" in Mass. -- I hope that is the case.) Either way, that is the truly interesting question in this case.

Posted by: Thomas B. Duffy | Oct 31, 2007 9:03:50 AM