The Stealth-Tax Republicans
The House GOP’s reform proposal for individual taxes is a mess, but now we learn it also includes a stealthy 45.6% marginal tax rate on some high earners. This dishonest surcharge betrays the GOP’s purposes of growing the economy and simplifying the code, and Republicans ought to kill this gift to the left that will be slapped on more Americans when Democrats return to power.
The GOP’s tax bill released Thursday collapses seven brackets into four—12%, 25%, 35% and 39.6%. But the 12% rate applies to a large range of income, up to $45,000 for individuals and $90,000 for married couples. This means more of a person’s income is taxed at a lower rate, even for folks who earn enough to reach into higher brackets.
But wait. The Ways and Means bill analysis notes that for high-income taxpayers the benefit of the 12% rate “would phase out.” For a single person earning $1 million, and couples who make $1.2 million, the benefit is phased out by $6 on every $100 of income, until the 12% rate relief has been clawed back. A married couple would thus face a 45.6% marginal rate on earnings between $1.2 million and about $1.6 million. Then the rate returns to 39.6%.
One ostensible reason for the phase out is that Republicans are passing around a collection plate to “pay for” business tax cuts and satisfy the Senate’s dysfunctional budget procedures. The party may think that the phase out will raise revenue, but don’t expect the money to materialize in the real world.
High earners may move their taxable income around to avoid the penalty. Or they will decline to work or invest on the margin, which is what creates jobs and lifts incomes. Balancing the budget tables will be a pathetic excuse to voters if the bill does not deliver on promises of growth and broad prosperity.
A second dynamic is that the Trump Administration is filled with people who feel guilty about driving a Porsche in college (Treasury Secretary Steven Mnuchin ), and don’t want to be perceived as cutting their own taxes. Yet it is not a “cut” to subject income below the threshold for the top rate to the same rate schedule as everyone else. The point of a progressive tax is to impose a higher rate only on higher earnings. Somewhere back in time the goal was also to make the code less distorted and easier to understand. The surtax defies that simplicity principle.
This tax ambush reminds us of PEP and Pease, the deduction and exemption phaseouts that Democrats deployed to increase taxes at the top, which the GOP bill repeals. Except the clawback is worse. Republicans had already surrendered lowering the top rate, which is the most potent engine for growth in the individual code. Now the GOP is pretending to abandon a surtax on millionaires while burying the same damage in its bill.
By separating small business income from personal returns, Republicans have also ensured the highest rate will never drop. Democrats must be thrilled because the 45.6% “bubble” rate will become the new top rate for everyone once they win back the White House and Congress.
The Reagan reform of 1986 lowered the top rate to 28% from 50%, but that has steadily crept back up, including the 3.8% ObamaCare investment tax the party failed to repeal earlier this year. With its new bubble bracket, the GOP is repudiating Reagan’s reform and bringing the top income-tax rate back to 50%. Voters might as well have elected Hillary Clinton.