With the election two weeks away, it is time to really pay attention to the tax plans of both Hillary Clinton and Donald Trump. The winner will have a hand in shaping tax policy for at least the next four years, and their plans are total opposites of each other.
Hillary Clinton’s tax plan
Clinton has made her tax plan objectives clear from day one: tax the wealthy to ensure they are paying their fair share of taxes. Her tax plan will:
– Add a 4% surcharge on individuals earning over $5 million.
– Enact the “Buffet Rule” and establish a 30% minimum tax on individuals with incomes over $1 million
– Limit itemized deductions (primarily state taxes, real estate taxes, mortgage interest and charitable contributions) to 28% of income
– Implement a tiered tax structure on capital gains depending on the length of time the asset is held, with the tax rate ranging from 20% for assets held more than six years to 39.6% for assets held more than one year
– Increase the estate tax rate to 45% and lower the estate tax exemption to $3.5 million
Clinton wants to raise taxes on the wealthy and create more spending programs such as debt-free college and investments in infrastructure. And while her plan will raise revenues by approximately $500 million over the next ten years, many economists fear that the higher taxes will have a negative economic impact – specifically a slowdown in GDP, lower wages and fewer jobs.
I have a few issues with Clinton’s tax plan:
- Her tax plan will not provide any significant relief for the middle class (and the fact that she does not want to raise taxes on the middle class does not equate to tax relief). Her primary form of relief is an expanded child tax credit, which will not provide much benefit to the middle class and will not help taxpayers without young children.
- I think the tiered capital gains tax rates will be a disaster (one of Trump’s favorite words). Massachusetts did this exact same thing from 1998-2002 and the state Supreme Court ruled that the tiered structure was unconstitutional. The whole point of providing a lower tax rate on capital gains is to spur individuals to make investments, but this tiered structure will take away much of that incentive and may also lead to a slowdown in the real estate market.
- Clinton has pointed out many times in her speeches and debates that when Bill Clinton was in office, he raised taxes and the economy flourished. This talking point ignores two major factors: 1) the internet and technology sectors absolutely boomed during those years and that growth was the primary driver of the economic expansion; and 2) Bill Clinton actually signed into law significant tax cuts in 1997, many of which are still in play today (annual increases of the estate tax exclusion, the home sale exclusion and lower tax rates on capital gains).
Donald Trump’s tax plan
Like Clinton’s tax plan, Trump’s tax concept is also straightforward, just in the total opposite direction. He wants to cut taxes all across the board. His plan will:
– Establish three tax rate: 12%, 25% and 33% with the 33% rate starting at $225,000 of income for married couples ($112,000 for single individuals)
– Repeal the Alternative Minimum Tax (AMT), the estate tax and the Obamacare surtaxes
– Lower the top business tax rate to 15% for corporations and self-employed individuals
– Increase the standard deduction to $15,000 (singles) and $30,000 (married couples)
– Eliminate personal exemptions
– Cap itemized deductions at $100,000 for single filers and at $200,000 for married couples
Trump’s tax plan will reduce taxes for everyone, but it comes at a price. Federal revenue will decrease by $4 trillion over the next decade, so unless spending cuts are enacted to offset the decrease in revenue, the national debt will almost double. Trump said in the last debate that his tax plan will not increase the national debt, but he hasn’t said exactly how he will accomplish that.
I also have issues with Trump’s tax plan:
- While most people want to pay less in taxes, lowering the tax rate is only one part of the equation. Trump hasn’t really detailed his spending cuts (“believe me” does not qualify as a detailed spending cut), and he has in fact said that he wants to increase spending in areas such as military and defense. It is classic deficit spending. Our national debt right now is at $18 trillion. The thought of that potentially going up to $30+ trillion is beyond scary.
- Trump subscribes to the trickle-down economic theory that lowering taxes all around (especially at the corporate level) will jump start the economy and increase wages, jobs and GDP. This works if companies use the money they save to increase economic output and create more jobs domestically, but it has had mixed results over the last century (it all depends on who you ask). Trump wants to go all-in with this.
- By eliminating the estate tax, Trump will probably have to also eliminate one of the most cherished tax benefits: the basis step-up. Currently, if you inherit an asset that has appreciated in value (such as real estate), you inherit that asset at its fair market value at death. You can the sell the asset without incurring any tax. That tax benefit will most likely disappear when the estate tax is repealed.
Health insurance reform
No matter who wins the presidency, there will be changes to Obamacare.
Clinton said that Obamacare needs to be tweaked. Her proposals will offer increased tax credits to people who buy health insurance through an exchange and will also provide tax credits to individuals and families to help offset soaring out-of-pocket costs and deductibles. She would also expand the tax credits for small businesses that offer health coverage to their employees.
Trump wants to scrap Obamacare altogether and start over, relying on current Republican ideas such as allowing all taxpayers to deduct the health insurance premiums they pay regardless of income level and allowing insurance companies to compete across state lines. He would also incentivize more people to utilize Health Savings Accounts (HSAs).
What to make of all this
The two tax plans really speak to the overall philosophical differences in our tax structure. Do you favor higher taxes, redistribution of wealth and more spending on government programs? Or do you favor lower taxes with the hope that the money saved will lead to a more robust economy with more jobs and higher wages?
As with any candidate’s tax plan, what is presented will be adjusted and compromised. A lot of what will be implemented will also depend on the makeup of Congress. While a lot of attention has been given to the candidates’ personal issues, their tax plans will implement significant changes that will have lasting effects beyond the next four years. But the only thing we know for certain is that when we wake up on November 9th, we will still be paying taxes.
If you are one of the millions of people who have received fake calls from IRS imposters saying you owe back taxes, there is some good news. Police in India raided and shut down nine call centers in Mumbai where 770 employees were working. 70 individuals were arrested in the midnight raid and charged with fraud. Since the raid, complaints about this scam to the Better Business Bureau Scam Tracker have decreased by 95%.