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Tax bill FAIL: Some high earners would top 100%

(National SentinelTax Deform: Under the Senate’s version of tax reform, some high earners could pay in excess of 100 percent after a certain level of earnings, The Wall Street Journal reported Monday.

Senate conferees are working to amend the provision, but if they don’t succeed, that means some high earners will pay $100 or more in income taxes for every $100 in earnings after a certain level.

On the broader level, House and Senate negotiators are attempting to reconcile their versions of the reform bill, as they look for ways to pay for eliminating the most contentious provisions.

Formally, the House and Senate conference committee meets on Wednesday in an attempt to hammer out compromises.

The possible marginal tax rate of 100 percent comes from combining tax policies aimed at benefitting businesses and families while denying those benefits to the highest earners. Some critics see that as punishing the rich, which is what they say the current tax code does.

As income rises and the tax breaks phase out, it will mean each dollar of income after a certain level will be taxed at regular rates, along with a hidden marginal rate on top of that, the paper said.

“That structure, if maintained in a final law, would create some of the disincentives to working and to earning business profit that Republicans have long complained about, while opening lucrative avenues for tax avoidance,” the WSJ reported.

As incomes move much higher, they will exit those phaseout ranges and marginal tax rates would go down again.

WSJ noted further:

Consider, for example, a married, self-employed New Jersey lawyer with three children and earnings of about $615,000. Getting $100 more in business income would force the lawyer to pay $105.45 in federal and state taxes, according to calculations by the conservative-leaning Tax Foundation. That is more than double the marginal tax rate that household faces today.

If the New Jersey lawyer’s stay-at-home spouse wanted a job, the first $100 of the spouse’s wages would require $107.79 in taxes. And the tax rates for similarly situated residents of California and New York City would be even higher, the Tax Foundation found.

“I would expect a huge tax-gaming response once people fully understand how it works,” said David Gamage, a tax law professor at Indiana University and a former Treasury Department official. He added that business owners have an easier time engaging in such tax avoidance than salaried employees do.

“The payoff for gaming is huge, within the set of people who both face these rates and have flexible enough business structures,” he told the WSJ.

Other tax experts also sounded an alarm about the final bill’s hefty tax increase for certain earners.

Julia Lawless, a spokeswoman for the Senate Finance Committee, said the two analyses raise a valid concern.”

“With any major reform, there will always be unusual hypotheticals delivering anomalous results,” she continued. “The goal of Congress’ tax overhaul has been to lower taxes on the American people and by and large, according to a variety of analyses, we’re achieving that.”

“This is a big concern,” said Scott Greenberg, a Tax Foundation analyst. “It would be unfortunate if Congress passed a tax bill that had the effect of making additional work and additional income not worthwhile for any subgroup of households.”

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