NEW YORK, NY December 05, 2007 —If Washington doesn't act quickly, an estimated one in five New York taxpayers - or 1.7 million people - will be subject to the alternative minimum tax next year. Also known as the AMT, it was intended to force the very wealthy to pay some minimum amount of tax, but because of inflation, it's capturing more middle class Americans. Congressman Charles Rangel has proposed getting rid of the AMT, for good, but to make up for the lost revenue, he's going after a segment of New York's financial elite. WNYC's Lisa Chow reports.

Rangel Faces Challenges in Proposal to Fix Tax "Loophole"

REPORTER: Charlie Rangel has been waiting. Waiting for more than 30 years to set the tax agenda. And he's not there yet, with a Republican administration and gridlock in the Senate. But he's patient.

RANGEL: What I wanted to do was redirect the priorities.

REPORTER: The AMT has given the Democratic congressman from Harlem an opportunity to lay out a broad tax plan. Most Democrats and Republicans agree the AMT needs to be fixed. But, getting rid of it means losing 800 billion dollars in tax revenues over 10 years, and so it's forced a debate on Capitol Hill: how do we recalibrate the system, and who should pay more?

RANGEL: I deal with real estate people, and money managers, hedge fund people, Wall Street and investment bankers, and I don’t expect them to embrace this. I know exactly what I’m doing.

REPORTER: Rangel says, we should raise taxes on wealthy individuals, particularly those making more than $500,000. Raise taxes on hedge fund managers by limiting their ability to shelter income overseas. And the one that's gotten the most ink and created a lobbying frenzy, raise the tax rate on managers of private equity, venture capital, and some real estate firms from 15% to as high as 35%.

RANGEL: They’re the ones with the lobbyists. They’re the ones that can get the attention. They’re the ones that will be screaming that Rangel has increased my taxes, and for those people who get unfair advantage, you bet your life, Rangel has increased your taxes so that you would pay a fair tax.

REPORTER: So here we've got a New York congressman going after a largely New York industry. Private equity is controversial. Critics say at their worst, the firms buy companies, load them up with debt, restructure them by slashing jobs and cutting benefits, and then resell them at a huge profit. Defenders say the firms buy some of the least wanted companies in the world and make them successful again. And they deliver great returns to investors, including pension funds for teachers and fire fighters. Mayor Bloomberg shied away when asked whether he supported raising taxes on private equity.

BLOOMBERG: I’m not going to get involved because I have too many conflicts. A lot of the people involved on both sides are former business associates, and they’re clients of Bloomberg and friends of mine. Senator Schumer has worked very hard to protect New York industry and Charlie Rangel has worked very hard to make sure our tax system is fair. I know that Rangel also cares about New York industry and Schumer also cares about fairness but I’ll leave it to them to work on those things.

REPORTER: So far, Senator Schumer has not made a public statement about the tax increase. His staff did not return several phone calls, asking for his position. So why the reticence on something that seems obvious? Private equity managers pay a tax rate that's lower than what many middle income workers pay. And when you hear what some of them make – how about enough to throw a multimillion-dollar birthday party and hire Rod Stewart to sing at it. When Stephen Schwarzman's company, Blackstone, went public, people learned that the Park Avenue resident made 400 million dollars last year, which by the way, is the equivalent of earning 760 dollars every minute. Rangel's bill would increase the tax rate these managers pay from the 15% capital gains rate to the 35% highest ordinary income rate.

RANGEL: The millions of Americans that pay taxes, they have to think the system is fair and equitable.

REPORTER: Governor Spitzer's office says he's still studying Rangel's plan. But he hinted at his views when speaking in New York City this fall about the state budget.

SPITZER: I hate to say I was gratified but I did notice in London the other day, they raised their marginal tax rates significantly on venture capital, hedge funds, etc., which suggests to me if we can hold ours constant, and we will and we have, then our competitive position obviously improves.

REPORTER: So the economic argument is New York will become less competitive. But is it made without political implications? Private equity managers give a lot of money to New York politicians. There’s also a practical question: will raising taxes on these managers actually achieve the objective of getting them to pay more? Doug Lowenstein is president of the Private Equity Council, a group in Washington that lobbies on behalf of the largest players of the industry, including Blackstone, KKR, and Carlyle.

LOWENSTEIN: These kinds of laws often have unintended consequences and it’s difficult to predict what will happen in private equity, but let’s just start with this. If you raise taxes on people 130% and think that people aren’t going to reexamine how they can structure their operations to recover as much as that increase as they can is naïve in the extreme.

REPORTER: Meaning, will this money just get moved? Absolutely, says Steven Kaplan, a professor at University of Chicago's business school.

KAPLAN: I’m not a tax person. I can think offhand of two ways to structure around it legally and if I can think of two ways, tax experts can think of many more.

REPORTER: Which begs the question: could this be another futile exercise in taxing the rich? For WNYC, I'm Lisa Chow.