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Uncle Sam is about to redefine which Americans are rich — again

Whether to raise taxes on the rich is one of the thorniest issues in tax reform. Underlying that debate is an even more fundamental question: Who exactly qualifies as wealthy?

Everyone can agree that Jeff Bezos and Bill Gates are pretty stinking rich. Those earning at least $1 million in income seem to be a clear-cut case as well. But when does an American start being rich? There is no ceiling on how much money one needs to be rich, but is there a floor?

The answer — at least when it comes to taxes — is entirely political.

“It’s just crazy the way these things work,” said Roberton Williams, a fellow at the Tax Policy Center. “But that’s just the way that it is.”

Defining “rich” will be central to the battle over reforming the tax code this fall. The White House has proposed consolidating the seven existing tax rates into just three — 10, 25 and 35 percent.

But the administration has not specified which households would pay which rates, a decision that will help shape the contours of class in America: The low-income pay the least; the rich pay the most. And Uncle Sam gets to draw the lines.

Under the current system, a married couple earning $470,701 falls into the highest tax bracket. They’re officially rich and required them to pay the top federal income tax rate of 39.5 percent.

But those numbers are just lines in the sand, drawn during the course of extensive political negotiations and subject to the ebb and flow of public opinion. That top tax bracket was established just four years ago, under President Barack Obama.

The move was part of a broader deal to avoid the “fiscal cliff,” the expiration of a federal stimulus package that would have hiked taxes on most Americans and, economists warned, could have thrown the country back into recession.

Instead, Obama and Republican leadership were forced to craft a delicate political compromise that shifted most of the burden on those they defined as wealthy — in this case, households earning more than $450,000 that year. (The current bracket has been adjusted for inflation.)

But Obama had long set the bar for being rich much lower. During his first presidential campaign, he vowed not to raise taxes on couples making less than $250,000 a year.

That number eventually became an important demarcation. To help pay for the Affordable Care Act, Obama proposed two new taxes that were widely described as targeting the rich: the Medicare surcharge and the net investment income tax. Both taxes kicked in once couples hit $250,000 in income.

President Donald Trump also honed in on almost the same number during his campaign. The final version of his tax plan released before the election consolidated the current seven tax brackets into just three. The highest one started at $255,000 for a married couple.

To be sure, Trump’s plan also called for lowering the top tax rate — a move criticized as largely benefiting the wealthy. But since taking office, Trump and his top officials have delivered conflicting messages about that proposal.

Treasury Secretary Steven Mnuchin has vowed that the White House tax plan would include no “absolute” tax cuts for the wealthy. Meanwhile, White House chief strategist Steve Bannon reportedly continues to float hiking rates on the rich. And Trump himself recently told The Wall Street Journal that “high-income people” could see an “upward revision.”

A lot of the tax fight this fall will come down to deciding exactly who those “high-income people” are. And no matter where lawmakers place the starting line, one thing is certain: It will surely move again.

Source: cnbc economy
Uncle Sam is about to redefine which Americans are rich — again

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