Charles Rangel: Chairman, House Ways & Means

By Maria Bartiromo

New York Representative Charlie Rangelwould be on your short list if you were going to pick a politician in Washington with the guts to start a national debate about tax reform. And that's just what the Democratic chairman of the influential House Ways & Means Committee has done. In late October, Rangel proposed a wholesale overhaul of the tax code that would eventually eliminate the alternative minimum tax (AMT) hitting many middle-class and upper-middle-class taxpayers. It would also cut corporate taxes while tossing out advantages enjoyed by companies in some industries. He would pay for the bill in part by raising taxes on so-called carried interest, a compensation method taxed at 15% that is employed by private-equity players and others. Rangel is under no illusion that his plan will become law anytime soon. He knows that a protracted battle lies ahead.

MARIA BARTIROMO

The middle class is getting socked these days. Diminishing home values, dried-up lines of credit, rising credit-card fees, and the AMT hitting ever more taxpayers. At what income level would families get relief from the AMT?

CHARLES RANGEL

Anybody below $200,000 would get immediate relief.

Let's look at boosting taxes on private equity managers to offset losses from the AMT. Won't Washington raise more tax revenue if firms are encouraged to do deals?

The controversy is not about accumulating capital and encouraging investment. It's that some people who manage these [private equity] funds are taxed at a much lower rate than others. Why? We had hearings, and we found that these people use a method that they call carried interest, so instead of getting paid ordinary salaries for what they do, they are saying that they get a percentage of the firm's capital [gains]Paragraph which is taxed at 15%. If it's money just like the others are making, they should be paying 35%.

One private equity guy I talked with contends that carried interest is more like an investment than wages or salaries: You don't get the money unless things turn out well.

There are many, many people out there who don't get paid if their time and energies do not succeed. And the testimony we heard was that as long as people are making the type of money they're making, 35% would not deter them.

Are these changes to raise revenue or address income inequality?

We're not just looking for the money. We're looking to take the fat out of the system and give tax breaks to those people who don't have lobbyists, who work every day, who are entitled to a better tax break. You know, Senator [Russell] Long, who used to be the chairman of the Senate Finance Committee, had a saying: "Don't tax me, don't tax thee, tax the guy behind a tree." The guy behind the tree is complaining, but he has not come out from behind the tree.

How much revenue would be raised?

We're talking about $50 billion that we have to close in on. Between the carried interest and some other things—we have [hedge fund] executives able to put billions in offshore havens—the total would be about $60 billion. So there are two things we're talking about: the big tax bill, which we'll be dealing with next year, and the current emergency, which is making certain that the alternative minimum tax doesn't fall on more people. The total cost of closing the loopholesParagraph is $70 billion.

Doesn't this plan hurt companies and wealthy individuals who are out there creating jobs?

There are 90 million people who are going to be the recipients of tax cuts. There'll be very few people making under $500,000 who would not be receiving tax relief. We're talking about less than a million and a half people [whose taxes might go up]. You know, Warren Buffett and other billionaires have come out and said that it's really about what obligations you have to your government. If we thought that by doing this there would not be investments and jobs would not be created, we wouldn't do it.

Isn't what Buffett is saying misleading? He says he gets taxed at a lower rate than his secretary. But his billions are in CDs or his stock. He's not getting ordinary income, so of course he's going to be taxed at a lower rate.

I just used him as an example. But the truth is that people who manage these equity funds don't put their money in, and their secretaries are taxed at 35%, while the money the [managers] get is taxed at 15%.

One economist who analyzed your plan said that it would raise taxes on some wealthy individuals to as much as 48%. How can that be an incentive for investment?

All I can say is that he misread the bill. You just tell the economist that if he goes back to the drawing board, he'll find that the tax for all people would be less than the tax that existed when Bill Clinton was President.

As far as lowering corporate taxes while at the same time eliminating preferences for businesses, you seem to be on the same page as Treasury Secretary Hank Paulson. Have you discussed your tax plan with him?

No, but I have discussed, in general, the page that you're talking about. And politically, I don't think he is prepared to embrace the closings of the corporate loopholes publicly.

Exactly.

What do you mean exactly? Aren't you shocked? I think it's shocking that a Secretary of the Treasury would see a proposed tax bill that would do almost exactly what he wants done and not embrace it.

Have you confronted him about that?

Watch that word "confront" now. I want to be a nice guy. But there was some criticism that came from the White House. [My answer is]: You've been in office for seven years and complained about the complexity of the system. You say that you want to get rid of the alternative minimum tax and lower corporate taxes to make us more competitive abroad. For God's sake, do you have any plan? Then you set up a commission to study the problem, and some of the [commission's proposals] were truly third rail. I mean, you're not going to touch the churches and the synagogues and the not-for-profits. You're not going to touch local and state, and you're darn sure not going to touch mortgage interest. And so the [Administration] didn't do anything. Yes, Secretary Paulson came and shared his views with my committee. And I am convinced that our legislative agenda is compatible with those conversations. But politically, he didn't come out and say: "Thank you, it's going to be good for the economy." So I'm surprised you're not surprised since you seem to believe we've done what he wanted.

Congressman, do you have anything else to add?

I hope you tell those people behind the tree who are complaining to come out and tell us all why they deserve preferential tax treatment. And tell them we're at war and people should be talking about making sacrifices and reducing the deficit. Also, they might want to tell us why so many of them put billions in foreign tax havens and don't pay any taxes at all.

Maria Bartiromo is the anchor of CNBC's Closing Bell.

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