WASHINGTON (Reuters) - A senior congressional Democrat outlined a sweeping tax overhaul on Thursday that would repeal a tax that was meant for the rich but has ensnared many middle-class Americans.

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Republicans blasted the proposal as a major tax hike. The bill would raise taxes on some wealthy individuals to help offset the revenue lost from repealing the alternative minimum tax.

U.S. House of Representative Ways and Means Committee Chairman Charles Rangel said his bill would provide more equity in the tax code and reduce the taxes paid by about 90 million middle- and low-income Americans.

“Like the president, we all agree that taxpayers know what best to do with their money rather than government,” said Rangel, a New York Democrat. “The differences we have with the president is that we don’t believe that you have to be rich in order to know what to do with your money.”

The alternative minimum tax was created in 1969 to ensure that the wealthiest Americans did not take so many tax breaks that they paid no federal income taxes. But because of inflation, the tax has captured a growing number of middle-income taxpayers. If Congress fails to act quickly on the AMT, as many as 25 million taxpayers could pay it when they file their 2007 tax returns next year.

Rangel said he did not expect a House vote on his measure before the end of this year. But he said he would try to push through a temporary AMT fix to keep that from happening while lawmakers debate the broader tax reform measure.

Republicans were quick to pounce on Rangel’s roughly $1 trillion proposal, calling it the “mother of all tax hikes” and saying it will hurt Democrats next year.

REPUBLICAN OPPOSITION

“It’s a great plan for us and its a bad plan for them,” said Rep. Roy Blunt of Missouri, the second ranking Republican in the House. “Thank God this plan is not going to happen.”

Tax reform and growing pressures on the budget as the 80 million baby boomers prepare to retire are likely to be major issues in next year’s presidential and congressional elections when Democrats hope to take over the White House and solidify their control of Congress.

Republicans say the AMT should be abolished without raising other taxes to offset the nearly $800 billion loss in federal revenues over 10 years.

Rangel’s bill would lower the top corporate tax rate from 35 percent to 30.5 percent. But it would close some loopholes and eliminate the “last in, first out” accounting method that allows companies to expense their most recent and most expensive inventories against their sales income. The proposal would hit oil companies especially hard given the recent increase in crude prices.

The bill would also raise tax rates for private equity fund managers who currently pay a 15 percent capital gains rate on earnings from their business deals. Their earnings would be treated as ordinary income, which has a tax rate as high as 35 percent.

The bill would replace the AMT with a surtax on income above $150,000 for individuals and $200,000 for couples. Rangel said the effect of the tax would be minimal for those taxpayers making less than $400,000.

The bill would raise the standard deduction for middle- and low-income taxpayers and expand the earned income tax credit for low-wage earners. It would also increase the amount of the refundable child tax credit.