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- The new House GOP tax plan has a small provision that adds a 6% surcharge for wealthier individuals, increasing their tax burden. The provisions would bump up the tax rate on people making more than $1 million a year above the advertised 39.6% rate. The provisions helps raise revenue, an important aspect for the tax plan.
Nestled in the massive tax bill released by House GOP leaders Thursday is a tiny provision that could have a significant effect on the tax burden of wealthier Americans.
Here’s how it works: Under the new tax bill, every American filing individually is taxed 12% on their first $45,000 of income – or the first $90,000 for couples. Wealthier people pay that rate on the first part of their income and eventually pay the top marginal tax rate, 39.6%, on every dollar they earn – above $500,000 for a single person and $1 million for joint filers. This is the way it has worked, just with new thresholds.
But the provision in the GOP tax bill proposes to claw back some of the benefit of the 12% marginal rate for wealthier people.
Every dollar after $1 million of taxable income for an individual or $1.2 million for a couple would incur a surcharge. It would add $6 in taxes for every $100 of taxable income earned above those thresholds – essentially, an extra 6% tax.
Let’s break down the math:
- For all individuals, on the first $45,000 you would pay $5,400 under the 12% marginal tax rate. If you were to pay for that first $45,000 at the top marginal tax rate, 39.6%, you would have to pay $17,820 on that income. That’s a difference of $12,420 that, for the sake of argument, the government is “losing out on” by using marginal tax rates. The surcharge in the tax bill would stay in effect until that $12,420 difference is clawed back. In order to make up that much money, the government would need to levy the extra 6% surcharge on $207,000.
So in effect, single people would be taxed at a marginal rate of 45.6% between $1 million and just over $1.2 million and married filers would pay that rate between $1.2 million and just over $1.4 million.
It’s unclear whether these peoples’ tax burdens would go up, since there are different tax breaks and deductions to take into account. It does mean, however, that there is a small “bubble tax” in the plan for millionaires.
Why it was included isn’t immediately clear, but Politico’s Danny Vinik calculated that it would raise $50 billion in new revenue over the next 10 years.
The House GOP tax plan would $1.487 billion in new federal debt over a decade, just under the $1.5 trillion allowed by the recently passed budget to be considered under recondition rules in the Senate.
In a game of inches, it appears that the bubble tax is another way House leaders barely kept their bill under the line.