The 'Mother of All Tax Bills'

Together, the two proposals would cost more than $1 trillion, which under House rules Rangel must pay for by raising taxes in other areas. "It has been more than 21 years since Congress and the Administration rolled up their sleeves to discuss tax reform, and during that time the tax code has become a jumbled mess of outdated and inequitable provisions that cry out for simplification," Rangel says.

The corporate rate cut is likely to spark the biggest business fight. That's because in order to cut the overall rate, Rangel has targeted three massive corporate tax preferences for elimination. Under the plan, some companies who benefit the most from those will end up paying higher taxes, while the rest of Corporate America will pay less. "This plan will split the business community all asunder," says one person familiar with the drafting of the proposal.

Let the Lobbying Begin

Rangel's plan won't pass this year, and it is questionable whether such a sweeping proposal could move in 2008, a Presidential election year that will likely be bitterly partisan. But the details announced on Oct. 25 could form the basis for a Democratic tax proposal in 2009, when there will be a new occupant in the White House -- possibly a Democrat. Rangel is a close political ally of Democratic Presidential front-runner Senator Hillary Clinton (D-N.Y.).

Businesses will lobby against one another furiously on the proposal, in the hopes of framing the debate well before the showdown in 2008 or 2009. Says R. Bruce Josten, executive vice-president at the U.S. Chamber of Commerce, the battle over this bill will likely pit those companies now paying a relatively high effective rate against those that benefit from deductions and loopholes to win a low effective rate for themselves. "This will be shades of 1986 all over again," says Josten, referring to the year in which the last major tax overhaul was completed. "These people will know very quickly who got screwed."

Proposal Breakdown

The details of Rangel's proposal show where the fault lines will be: To compensate for the estimated $360 billion, 10-year cost of lowering the overall corporate tax rate, Rangel will target three main tax breaks enjoyed by business.

-- The plan would repeal a domestic manufacturers' tax credit that was created in 2004. That would raise $115 billion over 10 years.

-- It would change the tax rules regarding foreign income for U.S. companies. The Rangel plan would require companies to defer deductions on certain overseas business expenses until the money is repatriated to the U.S. That would raise $106 billion over 10 years.

-- Rangel would eliminate a method of accounting for the value of inventory called "Last in, first out," or LIFO. That would raise $106 billion over 10 years.

Each of those proposals accounts for about $100 billion in estimated savings for the government. And each one has a passionate constituency that is poised to fight any changes. On LIFO, for example, an ad hoc group of companies led by lobbyists at the National Association of Wholesaler-Distributors (NAW) has banded together to fight past iterations of the proposal, and has been successful each time. "It's an opposition force much larger than I think many of the tax writers on the Hill imagine," says Jade West, senior vice-president of government relations for NAW. "We're horrified by this, and we're energized. We will generate thousands of 'Dear Charlie' letters against it."

The manufacturers' credit has vocal supporters, too: "At first blush, it seems like the tax increases will outweigh the corporate rate cuts for most of our members," says Dorothy Coleman, a vice-president at the National Association of Manufacturers. (NAM declines to disclose its membership.)

Finally, even the changes in foreign tax rules will split the business community, says Scott Talbott, senior vice-president for government affairs at the Financial Services Roundtable, a trade association that includes some of the biggest financial institutions in the country, including American Express (NYSE: - ), JPMorgan Chase (NYSE: - ), and Wells Fargo (NYSE: - ). "It places U.S. companies with an international presence on the other side of the table from U.S. companies who only operate (domestically)," Talbott says.

For and Against

At the same time, the Rangel ideas are likely to find warm support among retailers, who are largely domestic, and whose just-in-time inventory tactics mean they will be little affected by the LIFO accounting changes. Rachelle Bernstein, vice-president of the National Retail Federation, explains that her group has long supported lowering the corporate rate while broadening the base of dollars that are subjected to the tax, which is what Rangel's proposal would do. "We certainly like the direction of the proposal," Bernstein says. Her group includes companies such as J.C. Penney (NYSE: - ), Sears (NasdaqGS: - ), and Home Depot (NYSE: - ).

Another industry indicating early support is aerospace: "We are encouraged," says John Douglass, president and chief executive of the Aerospace Industries Assn. "This is a good first step in the process of achieving meaningful tax reform." The association's members include Boeing (NYSE: - ), Honeywell (NYSE: - ), and Lockheed Martin (NYSE: - ).

Elsewhere in the bill, Rangel proposes changing the rules on taxation of carried interest on investment fund managers, which he says will raise $25.66 billion in 10 years as one measure to help pay for the AMT repeal; the repeal will cost a hefty $795.6 billion over 10 years. The carried interest proposal sparked immediate outrage from hedge fund managers when it was floated over the summer, and it is thought to be all but dead this year in the Senate.

The Rangel proposal was immediately denounced by Republicans on Capitol Hill as the "Mother of All Tax Hikes." Treasury Secretary Henry Paulson Jr. came out against it, saying, "The legislation unveiled today would dramatically raise taxes in ways that, in my judgment, would hinder America's ability to compete in the global economy."