On Thursday, Republicans released the details of their ambitious new tax reform bill. The legislation aims to lower the corporate income tax rate to 20 percent (down from 35 percent), cap the small business income tax rate at 25 percent, double the standard deduction, and simplify the tax code by reducing the number of tax brackets from seven to four.
For the overwhelming majority of Americans who pay taxes, this plan would provide important tax relief. Some middle-income households will save thousands of dollars every year, and most lower-income households will pay no or very little federal income taxes. But hidden within this Republican bill is a provision that looks awfully similar to something Democrats would cook up: a hidden fifth bracket that would force some wealthy Americans to pay 45.6 percent on some of their income.
The Republicans’ hidden bracket
Politico’s Danny Vinik explained how this secret tax would work in an article published Thursday: “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.”
Congressional Republicans have been telling Americans since the plan was released there would only be four brackets: 12 percent, 25 percent, 35 percent and 39.6 percent. The 12 percent bracket applies to individuals earning up to $45,000 and married couples up to $90,000. The 39.6 percent bracket would only apply to single filers earning at least $500,000 and married filers earning at least $1 million. Most Americans would fall in the 12 percent and/or 25 percent bracket. (For a detailed outline of brackets, read page 9 of the Republicans 33-page tax bill summary, available here.)
Why they did it
As Vinik notes, the purpose of the hidden fifth bracket is to get many of those earners in the 39.6 percent bracket to pay more than everyone else on the first $45,000 they earn — without making it look like Congress is raising their taxes. The reason for this is obvious: Republicans wanted to say they weren’t raising anyone’s taxes, but they needed to find a way to keep the tax code simple and come up with more funds without raising middle-income earners’ taxes beyond the rates they outlined in their plan. By sneaking this surcharge into the bill, Republicans thought they could get the wealthy to pay a little more without anyone noticing. They were wrong.
This isn’t just wrong, it’s immoral
At this point, it’s important to keep in mind that the secret 45.6 percent bracket phases out after earners pay $12,420 in extra taxes, which isn’t a whole lot of money when you’re talking about income earners who make more than $1 million in salary every year, especially when you consider that some of them will get tax relief from other parts of this plan.
But whether wealthier people can afford to pay the tax isn’t the point. This plan was crafted by members of the Republican Party, which is supposed to defend people’s right to keep as much of their own money as possible. This is worth stating again: The $12,420 we’re talking about belongs to those being forced to pay the taxes. The government is not, in any way, entitled to it.
Republicans should be working hard to protect every penny of taxpayers’ money, even for the wealthy. Obviously, there are certain expenses the federal government should cover (such as the military), and they need to collect taxes to do so. But Republicans should be fighting vigorously to ensure they don’t take a penny more than they need. Raising taxes on an already overtaxed group of people is not just numbers-shifting, it’s immoral and it’s a violation of the mandate they were given by the voters who elected them, most of whom don’t want to raise taxes on anyone at all.
Keeping the plan quiet
And if taking the wealthy’s $12,420 isn’t a big deal, why did Republicans go out of their way to conceal it? In Politico’s article, it was reported that Steve Moore, a brilliant free-market economist at The Heritage Foundation who has been heavily involved in helping to craft this tax plan, told Vinik he didn’t even know the surcharge existed.
“I was just in a briefing with the White House on this,” Moore said to Vinik. “They didn’t mention that. It seems kind of bizarre to me.”
This is stunning, because if anyone would be expected to know about this surcharge, it would be Moore, proving just how quiet the bill’s framers have kept this secret tax bracket.
In the grand scheme of things, most Americans, including wealthier earners, will get a net tax break, with or without this surcharge. And many wealthier earners will benefit directly or indirectly from the lower corporate tax rate proposed in the legislation. But make no mistake about it, some congressional Republicans tried to use income redistributionist principles to avoid having to make tough choices elsewhere. Rather than cut spending, they decided to penalize the much-maligned “rich.”
There’s nothing remotely “conservative” about that.