By DeEtte L. Loeffler, J.D., L.LM, Taxation
It is difficult in this current environment to obtain truly neutral analysis of anything, including the tax proposals of the leading presidential candidates, Hillary Clinton and Donald Trump. The Tax Policy Center has been accused of using “old modeling” that supports Democratic positions, while the Tax Foundation has been accused of using modeling designed to support the Republican positions. Modeling, as you know, is an imperfect science because it requires the modeler to use assumptions about how individuals and businesses will respond to increases in taxes, decreases in taxes, the introduction of new taxes, and/or the elimination of old ones. This article is intended to be neutral, but we cannot guarantee the accuracy of the information on which it is based. Information has been collected from the Tax Policy Center, the Tax Foundation, and the public websites of both candidates. We hope this information is helpful to you.
The Clinton Tax Plan
According to her website,1 Hillary Clinton is proposing a tax system in which all Americans pay a “fair share” of the taxes. Change would include:
Adopting the “Buffett Rule” to impose a minimum rate of 30% on those earning $1 million or more annually and imposing a 4% “fair share surcharge” on 20% of all taxpayers earning $5 million or more annually;
Capping additional contributions to high value retirement plans (the “Romney Loophole”);
Taxing “carried interest” at ordinary income rates;
Decreasing the estate tax exemption to $3.5 million (from $5.45 million currently), increasing the rate to 45% (from 40%), and imposing a graduated rate schedule of up to 65% on estates over $1 billion;
Imposing an “exit tax” on companies moving their headquarters overseas (i.e., on inversions) and prohibiting earnings stripping by companies already located outside the US;
Ending oil and gas subsidies;
Creating a standard deduction for small businesses, allowing investment expensing and increasing deductions for start-up costs;
Making “excessive” health care and elder care expenses deductible.
Although not mentioned on her website, Ms. Clinton would also impose a graduated capital gains tax rate of 24% to 39.6% on “medium term” investments held more than one, but less than six, years.2 She would also limit the value of exemptions and deductions to 28% for high income earnings,3 and would modify the grantor trust rules to prevent income shifting.4
According to the Tax Foundation, her plan would result in a net increase in revenues of $191 billion over the next decade, and reduce the gross domestic product (GDP) by 1 percent, resulting in 0.8 percent lower wages and 311,000 fewer full-time equivalent jobs.5
According to the Tax Policy Center, her plan would increase revenue by $1.1 trillion over the next decade, with nearly all tax increases falling on the top 1.0% of earners. It would also decrease the federal deficit by $4.3 trillion by 2036.6
Trump Tax Plan
According to his website,7 Donald Trump is proposing the following changes to the federal tax system:
Collapsing the current seven (7) tax brackets into three (3): 12% (for those earning up to $75,000), 25% (for up to $225,000) and 33% (for those over $225,000);
Repealing the 3.8% Net Investment Income Tax (NIIT);
Taxing “carried interest” as ordinary income;
Eliminating all personal exemptions, increasing the standard deduction to $15,000 per taxpayer (from $6,300), and capping itemized deductions at $100,000 per taxpayer;
Repealing the estate tax, but imposing capital gains tax on assets at death (excluding the first $10 million). Also prohibiting gifts at death to private charities (established by taxpayer or relatives);
Reducing the corporate tax to 15% (from 35%) and eliminating the AMT on business;
Imposing a 100% one-time tax on unrepatriated corporate earnings kept off shore;
Eliminating more corporate expenditures, except Research and Development, and allowing corporations to elect to expense investments instead of deducting them.
Although not mentioned on his website, Mr. Trump will also repeal the federal gift tax and repeal the individual AMT.8
According to the Tax Policy Center, his plan would cut taxes for all taxpayers, but the highest cuts would go to high income earners. It would reduce tax revenues by $9.5 trillion over the next decade. Two-thirds of the anticipated revenue loss would come from reduced individual income taxes and one-third from cuts to the corporate tax.9
According to the Tax Foundation, his plan would decrease tax revenues by a net $10.14 trillion over the next decade, but result in higher interest payments for the national debt. Assuming the tax cuts can be financed, it would increase GDP by 11.5% over the long term and lead to 29% larger capital stock, 6.5% higher wages, and 5.3 million more full-time equivalent jobs.10
While tax plans are just that, plans, it appears clear from the information above that significant changes may be implemented in the next presidential term. We will continue to keep you informed as we identify proposals that may impact you, your families, and your business.
3. The cap would apply to all itemized deductions, (except charitable contributions, which are already capped at 30% or 50% of AGI), exempt interest, excluded employer provided health insurance, and deductible contributions to tax preferred retirement accounts.