Research Fellow  John C. Fortier

Politics is a balancing act. Congressional Democrats are weighing two competing goals. On the one hand, they are appealing to business and arguing that they can be good stewards of the economy. On the other hand, they have many programmatic desires like healthcare reform and a more progressive tax code, which will be expensive and raise cautionary flags with economists.

The recent tax reform proposal by Charles Rangel (D-N.Y.) is a trial balloon. It is big, bold and comprehensive, but it is going nowhere this Congress. It is, however, the first stab at what might be a major shift in economic priorities in the 111th Congress if Democrats retain their majority and Hillary Clinton occupies the White House.

Chairman Rangel is perhaps the best person to craft a program along these lines. He is a partisan from an overwhelmingly Democratic district, but he is also known as someone with whom business can work. A former Bush administration official once told me that he enjoyed working with Rangel because at the end of the day, he was not looking to politically posture, but he was willing to cut a deal. Rangel earned praise as a pragmatist in an article entitled "Learning to Love Charlie Rangel" in the recent inaugural issue of the American, a free market magazine associated with my home institution, the American Enterprise Institute.

Rangel's recent tax proposal shows all of the marks of the art of the deal. It includes provisions to lower the corporate income tax and eliminate corporate deductions that most economists favor. The proposal is also cleverly crafted to draw some business and lobbying support, especially in the heavily taxed retail sector, as Jessica Holzer reported in the Hill on Tuesday. Rangel's package also targets lower-income Americans by expanding the standard deduction and child tax credit. Most significantly, it eliminates the Alternative Minimum Tax, which would otherwise hit many millions more Americans in the coming years.

All of the fun stops at this point, however, as Rangel's plan makes up for the revenue loss by instituting a surcharge on wealthier Americans. Not only has this raised cries of a Robin Hood class-warfare tax approach, it also worries economists, including my colleague Kevin Hassett, who see a top marginal tax rate on individuals approaching 50 percent.

Bill Clinton wrote the "New Democrat" playbook on these issues by emphasizing fiscal responsibility, raising taxes on the wealthy to close deficits and supporting free trade and other pragmatic business-friendly policies. But his economic record was also helped by the fact that some of his big early initiatives in healthcare and urban renewal were defeated and because, after 1994, Clinton and the Republican Congress checked each other's spending excesses. Finally, the booming economy did not force tough decisions.

Democrats in 2009 will face more difficult problems. To fix the Alternative Minimum Tax will cost billions, but it will not seem like a tax cut to most, only the death of a coming tax increase they had not anticipated. Democrats also often assume that they will allow parts of the Bush tax cuts to expire, but if they do so, many will feel a tax increase. Add to this Democratic hopes for a healthcare plan that will be expensive and the looming crisis in entitlement spending that will only increase over time.

The Rangel tax plan is a portent of how Democrats' ability to appeal to business and mainstream economists and their wishes for new progressive tax and healthcare policies will run up against a tough fiscal reality.

John C. Fortier is a research fellow at AEI.