GOP’s Hidden 45.6% Tax Bracket For Wealthy is For Real

I don’t want to be a broken record on the subject of the new GOP tax reform proposal, especially after devoting my entire E-Letter to it on Tuesday. Yet there is one troubling aspect of the new tax plan that has come to light this week as analysts dug deeper into the details.

That revelation, buried in the details, is that there is yet a fifth income tax bracket of 45.6% — an extra 6% tax – on those American families making over $1.2 million per year in income. I won’t say the Republicans tried to hide it, because it is buried in the language of the new bill. But they certainly didn’t talk about it and led us all to believe that the top tax rate is 39.6%.

I had actually heard about the 45.6% fifth tax bracket before I sent my E-Letter out on Tuesday, but frankly I didn’t believe it at first. Yet it turns out it is true – from the spineless Republicans no less! Here are the details.

House Republicans claimed the tax plan they introduced last Thursday keeps the top individual tax rate unchanged at 39.6% — the level at which it’s been capped for much of the past 25 years. But a little-noticed provision in the new bill creates a new bracket in which income is taxed at over 45%.

Thanks to a quirky surcharge in the fine print, American families who earn more than $1.2 million in taxable income would trigger an extra 6% tax on the next apprx. $400,000 they earn—a complicated change that effectively creates a new, unannounced tax bracket of 45.6%.

This goes against decades of GOP orthodoxy that raising taxes on the rich discourages job creation and reduces economic growth. No wonder they failed to mention it!

So here’s the thinking that led to this bizarre, stealth fifth tax bracket of 45.6%. The mainstream media has been portraying the new GOP tax plan as nothing more than “tax cuts for the rich” – nothing new about that – ever since the initial GOP tax reform “framework” was released in October.

More specifically, the media complained roundly that it is simply unfair for millionaires to be able to take advantage of the proposed lowest tax rate of 12% on the first $90,000 of income for families. Millionaires, they argued, should not be able to get that lower rate on any of their income. It should all be taxed at the highest rate of 39.6%, they demanded.

The Republicans caved. In an effort to deflect such criticism, the Republicans decided to add yet another higher (fifth) tax bracket on American individuals that make over $1 million and families that make over $1.2 million in income per year. For income earned over those levels the GOP added a surcharge of 6%, thus taking the highest tax bracket from 39.6% to 45.6%.

So, individuals making over $1 million and families making over $1.2 million would pay 45.6% on income above those levels on the next apprx. $400,000 they earn – so that the government can “claw back” the benefit of the 12% rate.

Does this sound bizarre? If it doesn’t, then I haven’t explained it well enough. It’s complicated. Consider re-reading what I have written so far. Or you can read how the left-leaning POLITICO – which likes the 6% surcharge on millionaires – explained it to its readers.

You might be wondering how many Americans this proposed new tax rule affects. The IRS reported that 438,000 tax filers had taxable income of more than $1 million in 2015 (latest data available). That means the 6% surcharge – also known as a “bubble tax” – could raise around $50 billion over the next decade, if adopted.

In the big picture, it’s not big money, but it is a big cave for the Republicans. What else is new?

Finally, I know I’ve focused exclusively on the GOP tax reform plan this week, which is unusual for me. But I think today’s revelation is something my clients and readers would definitely want to know about, regardless whether you make over $1 million a year or not.

Reminder: I’m not convinced in the least that the GOP will get meaningful tax reform passed this year. The Senate’s tax plan is due out later today, and the word is it’s very different from the House plan. If so, it will be difficult to come up with a final bill for the president to sign.

I’ll keep you posted.

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