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Yesterday the Republican leadership unveiled their much anticipated tax cut plan to the world. It is very much still a work in progress. The plan has potential, but also contains flaws that could lead to it actually harming America’s potential for greater economic activity.
The GOP used to recognize that lowering the top marginal rate would result in a bigger economic-pie for all Americans to share. Now it seems the Republicans have been cowed into a fear of reducing taxes for “the rich” by the Elizabeth-Warrens of the world.
Politico reports that the Republicans writing the bill (aided by registered Democrat Gary Cohn and long time donor to the Democratic Party Steve Mnuchin) have somehow managed to sneak into the bill a surcharge that would actually raise the rate on some high income earners to 46%. That’s certainly not what the GOP has been advertising in its campaign rhetoric.
Danny Vinik writes:
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.
Read more here.
Jeremy Jones, CFA
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