Thread: GOP's Hidden 46 % Tax Bracket

The GOP's Hidden 46 % Tax Bracket

11/02/2017


by Danny Vinik





House Republicans claim the tax plan they introduced Thursday keeps the top individual rate unchanged at 39.6 percent—the level at which it’s been capped for much of the past quarter-century. But a little-noticed provision effectively creates a new band in which income is taxed at over 45 percent.


Thanks to a quirky proposed surcharge, Americans who earn more than $1 million in taxable income would trigger an extra 6 percent tax on the next $200,000 they earn—a complicated change that effectively creates a new, unannounced tax bracket of 45.6 percent.

It hasn’t been advertised by Republicans, who have described their plan as maintaining the current top tax rate of 39.6 percent. And it goes against decades of GOP orthodoxy that raising taxes on the rich discourages work and reduces economic growth. Reached by phone, Steve Moore, a tax expert at The Heritage Foundation, said the surcharge was news to him. “I was just in a briefing with the White House on this,” he said. “They didn’t mention that. It seems kind of bizarre to me.”


The new rate stems from a provision in the bill intended to help the government recover, from the very wealthy, some of the benefits that lower-income taxpayers enjoy. Under the House GOP plan, all individuals—no matter whether they earn $35,000, $150,000 or $10 million—would pay the lowest rate, 12 percent, on their first $45,000 in taxable income. That’s a normal feature of current American tax law. But in the new plan, House Republicans want to claw back some of that benefit for individuals who earn more than $1 million, or couples earning more than $1.2 million.


Here’s how it would work: After the first $1 million in taxable income, the government would impose a 6 percent surcharge on every dollar earned, until it made up for the tax benefits that the rich receive from the low tax rate on that first $45,000. That surcharge remains until the government has clawed back the full $12,420, which would occur at about $1.2 million in taxable income. At that point, the surcharge disappears and the top tax rate drops back to 39.6 percent. This type of tax is sometimes called a “bubble tax,” because the marginal tax rate effectively bubbles up for a brief period before falling back to a lower level.


According to POLITICO’s calculation, the surcharge could raise more than $50 billion over a decade—money that will help the GOP meet the $1.5 trillion in increased deficits that their budget allows for and required to balance out tax cuts elsewhere. Balancing out those costs means that the bill can pass through budget reconciliation, and Senate Democrats can’t filibuster the bill.


Whom would it affect? According to the Internal Revenue Service, 438,000 tax filers had more than $1 million in taxable income in 2015, most of whom also make more than $1.2 million—meaning they’d pay the full additional $12,420 in bubble tax. Altogether, that surcharge could have raised roughly $5 billion in 2015, the latest year in which numbers are available, meaning it could potentially bring in around $50 billion over the next decade. That’s not huge money in a plan that cuts taxes $1.5 trillion—but every bit counts.


A spokesperson for the House Ways and Means Committee did not dispute the math but characterized the bubble as "the phase-out of a tax benefit" for high earners, rather than a surcharge. "The Tax Cuts and Jobs Act provides tax relief at every income level," said the spokesperson.


The idea of a bubble tax is not exactly new. In fact, the corporate tax code currently contains a bubble tax, which the GOP plan would eliminate. But the hidden nature of bubble taxes concerns experts who believe that the tax code should be easy to understand. “It certainly doesn’t promote tax transparency in terms of letting people readily understand the true rate structure,” said Alan Viard, a tax expert at the American Enterprise Institute. “I don’t think many people in the tax policy community are enthused about this kind of provision.”


The bubble tax also represents something of a break from nearly all Republican tax plans for the past few decades. Supply-side conservatives have long complained that the current tax rates on top earners are too high, discouraging work and reducing economic growth. House Republicans proposed lowering the top rate to 33 percent in the tax blueprint that they released last year. Over the past few weeks, faced with pressure from President Donald Trump to counter critics who said the plan is a giveaway to the rich and needing additional revenue, GOP leaders acceded to leaving the top rate unchanged. For a party that has focused intently on lowering marginal tax rates, it was a big concession.

Through the bubble tax, though, House Republicans quietly went a step further. The change could anger conservatives who dislike higher tax rates and weren’t expecting Republicans to include a bubble tax in their plan. After POLITICO explained the idea further to Moore, he said it was a “stupid policy” that goes against supply side theory. “All the benefits from rate reductions are from cutting the highest rate not the lowest rates,” he added.


For Democrats, the extra $50 billion from the rich is almost certain not to change their criticisms that the plan contains huge giveaways to the rich in the form of corporate tax cuts and the new 25 percent rate for so-called “pass through” businesses, which include everything from small businesses to hedge funds.


The bubble tax, in other words, is a way for the GOP to quietly raise much-needed revenue without changing the broader features of the bill. But it does mean that the top marginal tax rate would rise above 40 percent for the first time since 1986—the last year that Congress overhauled the tax code.

https://www.politico.com/agenda/stor...bracket-000570

I have no problem with that. That can be fixed in future years, the urgency now is to get it passed to cut the corporate and business pass-through tax rates so we can fix the US economy without raising the debt more than the $1,5 trillion cap set by Senate Rules and the bizarre way the CBO scores them. When the growth is there, and the deficits are down, they can go back and tweek it, or hopefully see the wisdom of just repealing the entire evil rotten income tax code altogether and convert to the FairTax or some version of a retail consumption tax. Very simple. JUST DO SOMETHING that will bring our good jobs back home and allow our companies to expand without penalty.

GOP leaders in advanced talks to change tax plan in bid to win over holdouts

Rand Paul: 'I plan to vote for the Senate tax bill' despite problems

• Sen. Rand Paul says he plans to vote for the Senate tax reform bill despite reservations about parts of it.
• In an op-ed, Paul praises the bill's steep revenue cuts and its provision to abolish the Obamacare individual mandate.
• But he also says the bill is "not perfect," and he'd like to see "more permanence" for individual tax cuts.

Christina Wilkie | @christinawilkie
Published 3 Hours Ago Updated 3 Hours AgoCNBC.com

Joshua Roberts | Reuters
Senator Rand Paul (R-KY)

Sen. Rand Paul, R-Ky., says he plans to vote for the Senate tax reform bill despite reservations about parts of it.

Earlier this year, Paul voted against the Republican-backed Senate budget resolution, which triggered the reconciliation rules needed to pass tax cuts with a simple majority. But in an op-ed Monday for FoxNews.com, he praised the bill's steep cuts to federal revenues and the abolition of the individual health insurance mandate.

This tax bill is a true test for my colleagues. I'm not getting everything I want — far from it. But I've been immersed in this process. I've fought for and received major changes for the better — and I plan to vote for this bill as it stands right now. I urge my colleagues to do the same. I urge you, their constituents, to make sure they hear from you.

Paul also said the legislation still has problems, some of which can be fixed before a final bill is voted on. Others, he wrote, may have to "wait for another day."

This bill is not perfect. I would prefer a larger cut. I would prefer that the Senate bill match the House bill and keep some form of state and local deductions so that no one gets caught in the trap of losing too many deductions at once and failing to benefit from the tax cuts. Lastly, I'd like to see more permanence on the individual side. Some of that is still achievable. Some of it is due to the peculiarities of the budget and Senate rules and will have to wait for another day.

Republicans are racing this week to secure the 50 votes needed to pass the bill, which would be the party's, and President Donald Trump's, signature legislative accomplishment this year if it becomes law.

At least six Republican senators have yet to commit to voting for the tax reform bill in its current form.

Read Paul's entire op-ed here.

https://www.cnbc.com/2017/11/27/rand...-problems.html