While Democrats continue to criticize the Republican House tax-reform plan as a big favor to the rich at the expense of the middle class, analysts are discovering it adds a little-noticed surcharge for the wealthy that effectively creates a 46 percent tax bracket, Politico reported.
While House Republicans claim the tax plan keeps the top individual rate unchanged at 39.6 percent, the proposed surcharge on Americans who earn more than $1 million in taxable income would trigger an extra 6 percent tax on the next $200,000 they earn.
Steve Moore, a tax expert at the Heritage Foundation, told Politico he was unaware of the surcharge.
“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.”
Sen. Rand Paul, R-Ky., said that while he’s happy with some aspects of the bill, it won’t deliver the “significant tax cut” Trump and Republicans promised.
Republican members of Congress, he said Thursday in an interview on “The Laura Ingraham Show,” have bought into the “class warfare” of the left, Lifezette reported.
The initial draft of the House’s Tax Cuts and Jobs Act, released Thursday, proposes to reduce the number of income tax brackets to four, with rates of 12, 25, 35 and 39.6 percent. In addition, the corporate tax rate drops from 35 percent to 20 percent.
The Heritage Foundation said in an analysis that the new 20 percent corporate tax rate “would help make the U.S. competitive with the rest of the world, and the top 25 percent small business or pass-through tax rate would go a long way toward stimulating entrepreneurship, job creation, and income growth across all income groups in America.”
But by maintaining the top marginal tax rate on individuals, Heritage said, “the plan would fail to achieve optimal economic growth, as it leaves a significant portion of economic activity subject to a 39.6 percent federal tax rate.”
The think tank explained that while only one of every 150 taxpayers actually pays the top rate, more than $1 of every $5 of taxable income is subject to it.
“That means a lot of economic activity is affected by the top rate, and lowering it would have a significant and positive impact on investment, productivity, incomes, and job growth in the U.S.,” Heritage argued.
Sen. Paul said if “you don’t cut the top 1 percent, you don’t really have a significant tax cut.”
“What they’ve done is, they’ve bought into the class warfare on the individual side,” Paul told Ingraham.
“So at the top, there’s not going to be much of a tax cut. There will be some. And in the middle, there’s going to be a little bit – there’s mostly going to be eliminating deductions. And at the bottom, the bottom already don’t pay much income tax and will continue not to pay much income tax,” Paul added.
Paul: Corporate cut will produce growth
Noting the U.S. has the highest corporate income tax in the world, Paul said Trump “has been a good leader on this,” insisting on a major cut.
“He has pushed up until the last minute of the last hour last night. House leadership is still trying to not give him the corporate tax cut he’s asked for,” Paul said.
Even though it doesn’t meet the 15 percent Trump called for during the election campaign, lowering it to 20 percent would still would “be huge” for the country, Paul said.
“I think we will see growth,” Paul said. “Already we’re seeing about 3 percent growth in the country because of the enthusiasm for President Trump and his policies. I think we’re going to get 4 or 5 percent growth if we get this thing through, within a year or two.”
For individuals, on the other hand, Paul said the bill doesn’t meet his expectations.
“I would like to see every individual up and down get a lower rate, and particularly on the top part of the spectrum because the top part of the spectrum pays most of the taxes,” he said.
Paul said many Republicans have bought into the Democrat narrative that tax breaks for the wealthiest Americans disadvantage poorer Americans.
“We have to understand that the owners of our businesses – the people we work for – are richer than us. They pay more taxes,” Paul said. “But if you lower their taxes, they will either buy stuff or hire more people. If you raise their taxes, it goes into the nonproductive economy, which is Washington, D.C., and it will be squandered.”
Paul said that if “rich people get a tax cut, we should all stand up and cheer because it means more jobs for us because you’re leaving more money in the private sector.”
‘Half a reform’
The Wall Street Journal editorial board also praised the corporate cuts while criticizing the plan’s treatment of taxes for individuals, calling it only “half a reform.”
The board said “we wish we could say it repeats the Reagan reform of 1986” but it “isn’t close.”
“The Ways and Means draft is instead a much-needed and pro-growth reform of business taxes marred by a mess on individual taxes that makes that part of the code even worse than it is now.”
Policy analyst Ramesh Ponnuru said, however, there will be benefits for individual taxpayers, summarizing the plan’s “winners and losers” in a Bloomberg column:
While we await detailed analyses, it appears that the big net losers from the Republican plan – those who will pay larger tax bills as a result of it – are upper middle-class people in high-tax, high-cost areas. The winners include businesses, and people higher and lower on the income scale.
Lower-income people will benefit from the increased standard deduction, and parents in the 10 percent bracket (for couples, that’s people with taxable incomes below $19,000) will benefit from the reform’s changes to tax benefits for children.
Higher-income people will benefit from lower average tax rates, lower taxes on pass-through business income, lower taxes on corporations in which they have shares, and lower estate taxes.
Reuters reported several high-tax Democratic states are complaining that under the plan, middle-class households will end up paying more taxes because the bill eliminates deductions for state income tax and caps property tax deductions at $10,000.
“I do think this has been developed in a way that looks at who were the prevailing forces in the presidential election and who were not,” Kevin Sullivan, Connecticut’s Commissioner of Revenue Services, told Reuters.
California and New York, with state income tax rates of 13.3 percent and 8.82 percent respectively, also would feel the pain.
Democratic New York Gov. Andrew Cuomo, in a letter to Trump this week, called eliminating or rolling back local tax deductability “a death blow to New York’s middle class families and our economy.”
“It’s clear this is a hostile political act aimed at the economic heart of New York,” he said.
Reuters noted Republican Rep. Lee Zeldin of New York opposes his party’s bill.
People in areas with high housing costs also will be affected, as the bill caps the tax deduction for mortgage interest at a loan value of $500,000 and eliminates the deduction for second homes.
Amid calls to make the cuts retroactive, White House economic adviser Gary Cohn said Friday in a Fox Business Network interview that it won’t happen, even if the bill is passed by the end of the year as hoped.
“We’re trying to deliver great tax reform to the American public. We can’t get it retroactive to this year. We’re trying to do a tax plan that starts on Jan. 1 of next year,” Cohn said in an interview with Fox Business Network.