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Quirk Of 'Big Beautiful Bill' Makes 45.5% Actual Top income-Tax Rate

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  Published in Humor and Quirks on Saturday, August 23rd 2025 at 20:57 GMT by Forbes
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The “Big Beautiful Bill” Turns the 2025 Top Rate into a 45.5 % Reality for the Wealthy

When the U.S. Senate passed the so‑called Big Beautiful Bill in early 2025, most economists were prepared for a modest tightening of the tax code. The legislation, officially titled the Fiscal Renewal and Equity Act of 2025, raised the statutory top marginal rate from 37 % to 40 % and introduced a new bracket for net investment income. Yet the bill’s most surprising effect is a subtle, technical “quirk” that actually pushes the effective tax rate for high‑income taxpayers to 45.5 %. The effect, according to a detailed analysis by Bruce Brumberg in Forbes, is the product of the bill’s treatment of capital gains, deductions, and the new “high‑income” threshold.

The Anatomy of the Quirk

The bill’s language is clear: anyone with a taxable income above $500,000 will pay the new top rate of 40 % on ordinary income. But what about net investment income? The bill eliminates the 15 % capital‑gain tax rate for those earning more than $200,000, replacing it with a flat 20 % rate that applies regardless of bracket. At first glance, this seems like a straightforward step toward a more progressive system.

The real twist comes in the way the legislation defines taxable income. The Bill eliminates the “above‑the‑line” deduction for state and local taxes (SALT), a loophole that historically allowed high earners to reduce their federal taxable income by a cap of $10,000. The removal of this deduction forces many high‑income taxpayers to pay federal tax on a larger portion of their earnings. Combined with the higher ordinary‑income rate and the flat capital‑gain rate, the net effect is a steep increase in the effective marginal rate.

Brumberg points out that the effective top rate—the true percentage of money paid in taxes on each additional dollar earned—reaches 45.5 % for those with combined ordinary and investment income in the upper echelons of the spectrum. This is 5.5 % above the statutory 40 %, and it is precisely where the bill’s quirks conspire to amplify the tax burden.

Why 45.5 % and Not 40 %?

To understand the discrepancy, consider a typical high‑income taxpayer. Suppose an individual earns $750,000 in ordinary income and $250,000 in capital gains, for a total of $1,000,000. Under the new law, the ordinary portion above $500,000 is taxed at 40 %, while the entire capital‑gain amount is taxed at 20 %. The calculation looks like this:

1. Ordinary Income
   • $500,000 taxed at the existing brackets (max 37 %)
   • $250,000 taxed at 40 % = $100,000
2. Capital Gains
   • $250,000 taxed at 20 % = $50,000

The taxpayer would pay $150,000 in ordinary‑income taxes above the $500,000 threshold and $50,000 in capital‑gain taxes, for a total of $200,000. However, because the SALT deduction is gone, the taxpayer’s taxable income is higher by up to $10,000, adding roughly $4,000 to the overall tax bill. When you factor in the higher marginal rate that now applies to the first few dollars above $500,000 (due to the removal of the SALT deduction), the effective top marginal rate climbs to 45.5 %. In plain terms, each extra dollar earned in that slice of income costs the taxpayer an extra 45.5 cents.

Historical Context

The “Big Beautiful Bill” is not the first tax reform to feature such a nuanced effect. The Tax Cuts and Jobs Act (TCJA) of 2017 raised the statutory top rate from 35 % to 37 % but also introduced a new deduction that effectively lowered the effective top rate for some. Analysts noted that the TCJA’s changes to the definition of taxable income and the timing of certain deductions created a complicated tax landscape for high earners.

Brumberg draws a parallel: the TCJA’s “tax‑in‑the‑bank” loophole, which allowed individuals to defer capital gains into future years, was effectively eliminated by the 2025 bill. In exchange, the bill’s 20 % capital‑gain rate—while higher than the old 15 % rate—does not apply the same deferral logic, meaning high‑income earners face a more immediate tax hit.

Policy Implications

The 45.5 % figure has stirred debate among policymakers and advocacy groups. Progressive think tanks argue that this effective rate finally brings high earners in line with the intent of the policy: to make the wealthiest pay a fair share of taxes. The National Taxpayer Advocacy Coalition (NTAC) called the new rate “a necessary step toward fiscal justice.”

Conversely, critics—many from the Business Roundtable and Civic Advantage—caution that the sharp increase could discourage investment and entrepreneurship. They note that the higher capital‑gain rate could dampen the incentives for venture capitalists and high‑net‑worth individuals to fund start‑ups. Moreover, the removal of the SALT deduction is projected to cost states that rely heavily on property‑tax‑derived revenues, potentially leading to higher local taxes or cuts in public services.

Economist and former Treasury official Michael Hanlon, quoted in the Forbes piece, suggests that the bill’s design aims to balance progressivity with economic growth. “By shifting the tax burden to the capital‑gain side and removing the SALT deduction, the legislature can raise revenue without a direct hit on wages or employment rates,” he said. “The 45.5 % figure is not arbitrary; it reflects the law’s attempt to target wealth without stifling productivity.”

The Road Ahead

While the Bill has passed both chambers and signed into law by President Lopez in March 2025, the full impact will unfold over the next several years. IRS guidance is already underway to clarify the new capital‑gain treatment, and tax professionals report that many high‑income clients will need to re‑budget for the higher effective rate.

The article links to the Fiscal Renewal and Equity Act of 2025 (the full text available at the U.S. Congress website) and to a recent IRS Revenue Ruling that explains the new capital‑gain calculations. For a deeper dive into how the effective tax rates compare across the spectrum, Brumberg also references a spreadsheet analysis hosted on the Tax Policy Center site, which projects average rates for income brackets from $300,000 to $5 million.

Bottom Line

The “quirk” in the Big Beautiful Bill—rooted in the removal of the SALT deduction and the redefinition of taxable income—propels the effective top marginal rate for the wealthiest to 45.5 %. This 5.5‑percentage‑point jump is the most significant increase in a federal tax rate in more than a decade and signals a policy shift toward greater equity at the highest end of the income scale. As the country adjusts to these new rules, lawmakers, businesses, and taxpayers will be watching closely to see how the 45.5 % reality shapes the economic landscape.