Tax the Rich? Okay, But How Much is 'Rich'?

Following-up, "House Democrats Consider 26.5% Corporate Tax Rate (VIDEO)."

One of these days Democrats will describe my income, as a college professor, as "rich." 

Seems like "rich" has been defined down consistently over the last two decades. Four-hundred thousand annually is usually the number you hear, but inflation's never figured into Democrat numbers, so people just making good money, but by no means wealthy (which in my opinion are folks with wealth in the tens of millions, at least), are always caught in the trap, as the clutches of government reach down farther and farther as time goes on.

At NYT, "Proposed Tax Changes Focus on the Wealthy":

So how do you define who’s wealthy?

The latest proposed tax changes from the House Ways and Means Committee essentially say a wealthy individual is someone who earns $400,000 a year or a couple with $450,000 in annual income.

“Rich is just the term we use to describe people who have more than us when we don’t think they deserve it,” said Brad Klontz, a financial psychologist in Boulder, Colo. “The definition of rich is entirely subjective,” adding that “$400,000 is just an arbitrary number — it might make you ‘rich’ in Middle America but middle class on the coasts.”

Four years ago, when the last changes to the Internal Revenue Code were made, the emphasis was on a lower tax rate for corporations and for super-wealthy individuals, particularly those who owned real estate and could profit from a very specific tax-deferral strategy on property.

This time around, corporations aren’t going to be paying significantly higher taxes, at least not as high as some progressives wanted. Instead, the tax legislation focuses on raising revenue from the wealthy.

“All of this legislation is focused on the individual and upping the ante for the wealthy,” said Michael Kosnitzky, a partner at the law firm Pillsbury Winthrop Shaw Pittman. “Increasing the corporate tax rate does not get at the wealthy because corporate taxes are paid by the shareholders, who get less dividends, the employees who get less salary, and the consumer, who pays more for goods and services. These proposals get at personal income tax.”

The proposed top income tax rate of 39.6 percent looks like the old top rate of 39.6 percent from 2017. It kicks in at $400,000 of income for an individual and $450,000 for a couple, which is slightly lower than the income level in 2017. Currently, the highest income tax bracket, at 37 percent, starts at $523,600 for an individual and $628,300 for a couple.

But those affected by the new rate would also pay more because there are fewer deductions than there were in the tax code before the 2017 changes.

“You have to look at the effective rate,” said Pam Lucina, chief fiduciary officer and head of trust and advisory services at the financial services firm Northern Trust. “We have far fewer deductions, so that 39.6 percent rate is a much higher rate.”

The one that affected many people was the loss of the full deduction for state and local taxes, or SALT. In the 2017 changes, the deduction was limited to $10,000 and primarily affected people who lived in Democratic-controlled states in the Northeast and on the West Coast, where state income and property taxes are high.

Limiting it brought the U.S. Treasury more money. In 2017, the unlimited deduction cost the federal government an estimated $122.5 billion; the cap brought that number down to $24.4 billion the next year.

The details of the tax proposal are still being negotiated, and lawmakers representing the states affected said they hoped that they could reinstate more of the SALT deduction. One proposal would double the deduction to $20,000, not a wholesale return to what it had been.

The tax that has defined this year’s discussion has been capital gains. The proposal in the legislation — raising the rate to 25 percent, from 20 percent, for people earning over $400,000 — came as a relief to two sets of taxpayers: the very wealthy and anyone who might inherit property.

The Biden administration began the year talking about raising the capital gains rate to the ordinary income tax rate for high earners and disallowing a provision that enables people to inherit property free of capital gains.

The administration’s original proposal talked about having a top capital gains rate of 43.4 percent — the top income tax rate plus the 3.8 percent surtax on investment income that pays for Obamacare — for people earning above $1 million. But most of the attention was drawn to President Biden’s proposal to end the so-called step-up in basis at death — which erases all the taxable gains in assets that are passed on to heirs. Repealing that would have brought in an extra $11 billion in tax revenue annually.

That proposal has since been dropped.

“No loss of the step-up in basis is a big win for wealthy families,” said Edward Renn, a partner in the private client and tax group at law firm Withersworldwide.

But that change wasn’t made to save wealthy families. It was done because the change could hurt families of more modest means who had assets to pass on to their children.

“The provision benefits very wealthy people who have built businesses,” said Justin Miller, the national director of wealth planning at Evercore Wealth Management. “But it also benefits any person who is inheriting a home from their parents and grandparents that could have hundreds of thousands of dollars that could be subject to capital gains tax. It would have impacted a lot of people, not just the top 1 percent or the top 0.1 percent. It would not have been a popular strategy.”

Taxes affecting estates and large gifts have long been ripe for tax changes. One change would bring the estate tax exemption back to the level it was at in the Obama administration. But that isn’t likely to raise more revenue from megamillionaires and billionaires. While the proposed exemption would fall to about $6 million a person from $11.7 million, the estate tax rate would remain at 40 percent. That’s what matters to the largest estates...