A Republican president and Republican Congress are threatening to do what President Barack Obama never could: raise taxes on the rich.
In an interview with CNBC, White House economic czar Gary Cohn said that the tax plan taking shape in Washington would effectively raise taxes on the rich by getting rid of deductions and simplifying the tax code.
"As you simplify the tax system, you actually reduce taxes on middle-class income payers and average Americans. And you're actually taxing the high end at a higher rate," he said.
Think about that. A former Goldman Sachs executive who works for a Republican billionaire president says he's about to raise taxes on the wealthy.
Clearly, this is a lot of spin. The White House and Congress are highly sensitive to criticism that their tax plans are simply tax cuts for the wealthy rather than broad economic relief for the middle class. Virtually all the independent analyses of their previous plans show that the biggest gains and the vast majority of the benefits will go to the wealthy.
But there are two changes that seem to be emerging from the most recent plan (which still remains a secret) that may change the math — at least for some of the rich.
First, it seems clear that the White House and Congress want to eliminate deductions, saving only the charitable deduction and part of the mortgage deduction.
The wealthy take the lion's share of deductions. The big one would be killing the deduction of state and local income taxes. That's a huge benefit to the high-income earners in California, New York, Connecticut and other high-tax states (which happen to lean Democratic in their politics). California and New York taxpayers alone deduct a combined $170 billion a year in state and local taxes.
Second, there is growing chatter that the top income-tax rate will not be reduced. Under President Donald Trump's and House Speaker Paul Ryan's original plans, the top rate of 39.6 percent was to be lowered to 35 percent. But there are reports that the top rate may be left unchanged to pay for the corporate-tax cut and other taxes in the plan.
If both those things happen — eliminating big deductions and preserving the top tax rate — then certain kinds of wealthy taxpayers will see their taxes go up. Specifically, high-income wage earners, or those who make their money from salaries rather than investments, who live in high-tax states could well see an increase.
We don't know any details or numbers yet. So it's impossible to know how many people's taxes will go up or by how much. Yet given that a large share, if not the largest share, of high-income earners live in high-tax states on the coasts, it's possible that many of the salaried wealthy will see a tax hike under the Republican plan now taking shape.
Of course, some of the wealthy will see a tax cut. Those who own their own companies or generate their incomes from investments could see their taxes reduced. The cut in the corporate tax rate will clearly help investors and corporate owners. And if Trump gets his proposal to allow pass-through income to be taxed at the corporate rate, then people who generate income from their own LLCs or C corps (like Trump) will get a big break.
Put another way, the "capital rich" — or those who make their money from money or owning a business — will see lower taxes. The working wealthy, who make their money from ordinary income, could see a tax hike because they are losing their deductions.
We will see in the coming weeks whether the claim about taxing the rich is mere window dressing or real.