Patrick Iturra Report,
A new bill has been proposed & under consideration. If it is passed, then the high-earning class of New York would pay an income tax of 61.2%, as suggested by the democrats.
Income Tax, New York
The marginal state & city tax rate in New York is 14.8%. However, the Democrats have proposed to impose a 3% surcharge on all individuals earning more than $5 million/year. The marginal income tax rate will also increase to 39.6% from 37% (current marginal income tax rate). It also preserves a 3.8% net investment tax as an extension for selected pass-through companies. Combining all this, the marginal federal income tax rate is 46.4% right now.
The marginal federal income tax rate is the tax on your income above the tax bracket threshold.
As per the bill, the total tax = Marginal Federal income tax rate (46.4%) + Marginal state & city tax (14.8%). This means that the high-paying class with more than $5 million would have to pay 61.2% in taxes.
If the bill passes, then the combined tax rate would be the highest in the past 40 years!
Apart from New York, Top earning individuals in California might have to pay a marginal tax rate of 59.7%. Similarly, New Jersey & Hawaii would face a combined tax rate of 57.2% and 57.4%, respectively.
There are no indications whether the current $10,000 cap in state and local tax(SALT) deductions would be revoked. If the SALT cap is repealed, it will benefit all the high-earning people. As many taxpayers have faced high tax rates during the 2017 tax plans as the deductions were removed.
This was the latest news from the recent parliament session, but let’s discuss how it will impact the rich!
How will the 61.2% Tax rate impact the Rich?
Everyone hates it when the tax rate increases! Nobody wants to pay higher taxes. This stays independent of the citizen’s income. Most middle-class and below middle-class vouch for higher taxes on the rich. The main point here is that the middle-class need the high earning people to pay higher taxes & their taxes should decrease.
It seems like the middle-class people are getting what they demand. As soon as the Biden administration took charge, they have been responding to their demands.
President Joe Biden has proposed to increase the top tax bracket for all those earning more than $400,000 to 39.6% tax against the current tax rate of 37%, but there would be some possible alterations.
But, how would 61.2% of taxes impact the rich?
Well, the idea of high taxes on the rich is not something new! If you check the history of American taxation, 37% of taxes would feel less. During the successful American years of 1951-1964, the top marginal tax rate was 91%, and it peaked at a whopping 92% in 1952-53. These were the years when the American economy’s foundation was being led on the grounds of capitalism & industrialism.
However, till the year 1980, the top rate decreased to 70%. Since then, the tax rate has been on the constant decline to support the economy’s growth and make sure that businesses grow & allow new start-ups.
Imagine if the taxes rate would be 90% in 2021? Feels like a financial nightmare.
However, one thing to note here is that the rich have become richer to expand their net worth from thousands to millions & billions despite all these high taxes. The rich find out ways to invest their income smartly so that they have to pay fewer taxes and build assets for themselves.
If the taxes do not affect the rich, then who?
The straightforward answer is that the working class would take the highest damage with the higher tax imposition. In the following section, I will explain how the higher tax rates will adversely affect the working class.
When Taxes Increase: The Working Class Feels the Crunch!
As a strategic investment advisor & asset manager with experience of more than 24 years! I would say that whenever taxes affect the working class. There will be a spike in inflation, layoffs, and price hike in day-to-day products.
The idea is to impose taxes on the rich earning millions, but they are also the ones who create & provide jobs. As the taxes increase, they pressure their employees, and some even lay off many employees to decrease their costs.
Everything depends on the profit and if the business owners are not profiting from their business. They will increase the price of their products in the market to gain more profits. As a result, inflation rises, and more money goes out from the pockets of the working class.
Therefore, the rich contributing more sounds a noble & ideal thing to do, but it also has adverse effects. Whether an employee or a general consumer, if the taxes on the rich increase, it will adversely affect the working class, and they will feel the crunch! It is a big financial nightmare! This is in respect to New York’s new proposed bill, but soon more states will follow.
What’s the solution?
Over the past 24 years, I have managed real estate investments of more than 500 million. I would say that the correct answer here is balance! Taxes should balance out for both the business owners and the working class.
Remember, Taxes make the rich richer & the poor poorer, and high taxes increase the income gap even more.