Washington is abuzz about the tax proposal introduced recently by House Ways and Means Chairman Charles Rangel (D-N.Y.). The bill tackles a host of tax policy matters but its centerpiece proposes to repeal the Alternative Minimum Tax (AMT) and offset that revenue loss with an $800 billion tax increase on the roughly 3.5 million taxpayers earning above $200,000 a year. The tax increase hikes marginal tax rates by nearly 5 percentage points. Republicans have been quick to attack this tax increase on small business owners and entrepreneurs and rightly point out that the high marginal tax rates in the Rangel plan would negatively impact the economy.

Yet Chairman Rangel's proposal is not the biggest hike on the horizon. Today's current tax code will "naturally" deliver a tax increase to all taxpayers in 2011. While Republicans have attacked the Democrat's proposal as "the mother of all tax hikes", the biggest tax increase is the pending expiration of the 2001 and 2003 tax cuts. That hike will boost tax collections by over $200 billion a year after 2011, more than twice the size of the revenue raisers proposed by Rangel.

The reason that these "natural" tax increases are on the horizon is a function of the legislative process and bizarre rules of the United States Senate. Senate procedures are such that while a permanent tax increase can be enacted with a simple majority vote under a budget process known as "reconciliation," a permanent tax cut requires support from 60 Senators. Tax cuts can be enacted through the 51 vote reconciliation process but the rules require those cuts to be temporary (up to ten years). As a result of these rules and slim Republican majorities in the Senate, the key individual tax cuts enacted by the Republican Congress over the last six years are set to expire at the end of 2010.

If Congress does not act to prevent these hikes, the impact will be dramatic. According to an analysis by the Treasury Department, for a family of four earning $50,000, it will be, an average tax hike of $2,100. Five million taxpayers currently paying no federal income tax will be brought onto the tax rolls. Marginal tax rates would rise for most taxpayers. The tax on dividend income would more than double and capital gains tax rate would jump from 15 percent to 20 percent. In a time when the tax on capital has been declining in other countries to encourage investment and attract capital, the U.S. tax code is scheduled to head in the opposite direction.

While these tax hikes are slated to occur under current law, the political reality of what will happen in the next few years is much more complicated. For one, after 2008, the President's budget won't be advocating a simple extension of current law. The next President, Democrat or Republican, will craft his or her own tax agenda. Second, budget pressures are rapidly becoming near-term problems and therefore likely to attract substantial political attention. Extending hundreds of billion in annual tax reductions without other changes may be politically untenable.

Finally, this "natural" tax hike is above and beyond the increases that Rangel is proposing. If Democrats are able to find a revenue neutral solution to the $800 billion AMT challenge, they will have to raise marginal rate themselves and/or accepted base-broadening opportunities, thereby making the implementation of less painful tax hikes after 2011 doubly difficult. On the other hand, if Democrats in Congress fail to address the AMT, it will affect so many households that the ordinary tax system will become marginalized.

Fortunately, this apparent political bind facing the tax code also presents an opportunity. While increasing marginal tax rates would be bad for economic growth, the current economic distortion caused by the multitude of tax subsidizes and untaxed activities also harm economic efficiency considerably. For example, as a result of the mortgage interest deduction for homeowners, capital is diverted from productive use (where it is taxed) into building bigger houses and inflating home prices. The current tax system also gives larger tax breaks to higher income taxpayers (and no breaks to lower income taxpayers) who pay large state and local tax bills. According to the nonpartisan Joint Committee on Taxation, eliminating all existing tax deductions and credits (except for the standard deduction and earned income tax credit) would allow Congress to not only keep the lower rates enacted in the last few years without increasing the deficit, but to lower marginal tax rates an additional 25 percent from current law. For example, the top marginal tax rate could be lowered to 27 percent while the lowest rate, ten percent, could be lowered to 7.5 percent.

While such a radical reform would not survive a moment of legislative sunlight, it illustrates the fact that the pending increase in marginal tax rates scheduled to arrive in 2011 could be mitigated by broadening the tax base. Furthermore, Rangel could have proposed a budget neutral solution to the AMT that didn't raise marginal rates.

The election for the next President of the United States is one year away. That President will confront a tax code scheduled to unravel and the opportunity for tax reform be presented. But, it remains to be seen if the end result is an improvement or not.

Alex M. Brill is a research fellow at AEI.