Rangel's Tax Increase

Rep. Charles Rangel has a keen understanding of the way in which tax cuts drive growth and prosperity. After all, he's been among the most ardent supporters in Congress of the provision that allows money managers to avoid 90% of their federal income tax liability by moving their legal residences to the U.S. Virgin Islands.

In 1993, he almost single-handedly inserted "empowerment zone" legislation into the federal budget, which resulted in the creation of a Harlem district that, as Mitchell Moss reported in a 1995 City Journal article, gave businesses "a 20 percent tax credit for the first $15,000 of wages and training expenses paid to employees who live or perform most of their work in the zones. In addition, small businesses in the zones are allowed to deduct an additional $20,000 per year for depreciable equipment, beyond the $17,500 already permitted."

The congressman isn't even a huge fan of the capital gains tax. In a 2000 interview with Businessweek, Mr. Rangel was asked if he would support a cut in the capital gains tax. "I have no problem reducing the tax burden for people who take risks," he replied at the time. Jude Wanniski reported in 1997 that on the capital gains tax, "Charlie has been telling me for years that he favors indexation," that is, the idea that the capital gains tax should apply to only real, after-inflation gains.

So what in the world is Mr. Rangel, now the Powerful Chairman of the Tax Writing Ways and Means Committee, doing signing on to Rep. Sander Levin's bill to change the rules on private equity and hedge fund managers so that their fees would be taxed as ordinary income rather than as capital gains? What is he trying to do, make Midtown Manhattan and Greenwich, Conn., look as economically desolate as the closest city to Mr. Levin's congressional district, Detroit?

Why not London, where last week's record art auctions offered a glimpse at the economic energy unleashed by a low-tax environment for funds and their managers. The principle is the same — if lower taxes can motivate economic activity in the Virgin Islands or Harlem, then higher taxes in America can drive economic activity to London.

It's not as if the government needs more money. Federal tax revenues in 2006 were $2.4 trillion, the highest ever in nominal terms. They amounted to 18.4% of GDP, according to the Congressional Budget Office. Back in 2000, when Mr. Rangel was talking about reducing the tax burden, the federal government was taking in only about $2 trillion a year, or $400 billion less than it is now, after President Bush's tax cuts.

So what's this all about? It looks to us like Mr. Rangel is enlisting in the war on success, sending the rest of the world the message that they should invest their money elsewhere. Whereas once it was only publicity-hungry prosecutors who targeted the wealthy, now the legislators are joining the hunt. At least Mr. Rangel, so far as we can tell, isn't driven by commercial considerations to favor such a tax increase. Warren Buffett is scheduled to meet in New York tonight for a public "conversation" with Senator Clinton.

If they get onto the topic, Mrs. Clinton might ask him if one of the reasons he favors raising taxes on hedge fund managers and private equity operators is that they compete with his company, Berkshire Hathaway, in buying businesses. Another good question would be if tax incentives can drive growth in Harlem and in Virgin Islands, why the itch to drive up rates in the rest of America?