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11/06/2007: "Tax Reform Again"

Rep. Charles Rangel (D-NY), chairman of the powerful House Ways and Means Committee, has proposed an interesting tax reform package that is not getting a lot of support from either party or from either party's presidential candidates. The question is why not?

Rangel’s proposal (10-page PDF), which gets at a number of problems, including the alternative minimum tax, is designed to be revenue-neutral. To accomplish that goal he would balance reductions for middle and lower class taxpayers by collecting more money from hedge fund managers who have been using offshore tax havens to avoid paying their fair share as well as private equity and hedge fund managers who have been avoiding paying the rates the rest of us pay.

If you haven’t had to pay the alternative minimum tax yet, don’t feel smug. This year another 21 million middle class taxpayers will join those of us who are already members of this unfortunate club. Created decades ago to prevent rich people with getting away without paying any taxes, the drafters of this measure failed to account for inflation and as a result today the AMT brings in so much money that Congress can’t bring itself to shut off the spigot.

I like Rangel’s plan and suggest that both Republicans and Democrats can find something in it for each of them. Democrats should like it because it will lower taxes for middle class people, many of whom are suspicious that Democrats have not shed their “tax and spend” mentality. Republicans should like it because they really don’t want to be seen as defending taxing multi-millionaires at half the rate of many two-wage earner families.

Why then does it seem that logical, common sense proposals that deal with taxes don’t have much of a chance? If you want to understand the problem consider the following proverbial iceberg protrusion.

You may have read about the case of Concurrent Technologies, an organization that emerged out of a university-government grant proposal in 1988 and has grown into a $250 million a year operation whose chief executives are paid just under a half a million dollars each and which contributes tens of thousands of dollars to the campaign committees of key members of Congress who in turn make sure that Concurrent keeps getting more and more “grants”.

Having founded and managed a company with several moving parts, I know how hard it is to stay focused and do a few things well. Concurrent, however, excels in doing anything and everything that they can get government funding to do. A few examples include software engineering, environmental and security consulting, training mine-detecting dogs, organize conferences, conduct missile defense and hydrogen fuel research and develop special armor for military combat vehicles.

Quite a company…except that Concurrent is not a company. It’s a not-for-profit charitable organization approved by the IRS as such because according to the Washington Post it “lessens the burden on governance” and helps “the federal government and American industry to perform more effectively through the use of emerging technologies.” Mention that argument when the IRS tells you that you owe penalties because you forgot to list the $100 you won at poker last year and see what it gets you.

The five members of Congress who do Concurrent’s bidding – making sure it gets earmark (non-competitive) funding – include 3 Republicans and 2 Democrats.

That my friends in a nutshell is why tax reform is not very popular in the nation’s capital. Our congressmen and women are having too much fun collecting campaign contributions while finding ways to subvert the nation’s ideals of competition and equal opportunity for the Concurrent Technologies of the world.

Understand that I am not commenting on the specific projects that Concurrent was funded to undertake. Some were probably worthwhile. The problem starts with the fact that the federal government has so much money to spend that millions of dollars are many agencies' rounding errors. Further post 9/11 Congress and the federal bureaucracy is more likely than not to dispense with the rules that are supposed to govern the awarding of such monies. As a result the taxpayer in many cases no doubt overpays for inferior results...that is when we even get results.

Thus you can expect hedge fund managers to continue paying 15% on their earnings next year while 21 million more middle class taxpayers will be writing quarterly checks to the IRS. And something will pass Congress in a year or two that will be called tax reform, but we’ll know different, won't we!