HOT TOPIC: Election 2016: The Candidates’ Tax Proposals
It’s no surprise that the major candidates have strong disagreements on the overall direction of tax policy; it may be more surprising that they agree on a number of specific concerns.
In general, the Clinton campaign characterizes its tax plans as an effort to require high-income taxpayers and large corporations to contribute a greater share of tax revenue in order to fund measures that may benefit middle- and lower-income taxpayers and small businesses. On the other hand, the Trump campaign characterizes its program as reducing and simplifying taxes across all brackets, with the lost revenue to be replaced by new tax revenue generated through potential economic growth.
Here are some of the key proposals, based on the candidates’ speeches and campaign materials. Keep in mind that regardless of who wins on November 8, any changes to tax law would require congressional action.
The Trump tax plan would reduce the current seven income tax brackets to three, with the top rate falling from 39.6% to 33%, and repeal the alternative minimum tax (AMT). The Clinton plan would maintain existing brackets and add a 4% “fair share surcharge” on those with adjusted gross incomes exceeding $5 million a year. Clinton also proposes a 30% minimum effective tax rate on individuals making more than $1 million a year (the “Buffett Rule”), presumably as an additional level in the AMT.
Deductions and Exemptions
Both candidates would cap itemized deductions for high-income taxpayers, though the caps would be triggered at different levels. The Trump plan would also eliminate personal exemptions and raise the standard deduction.
Currently, lower tax rates apply to qualified dividends and long-term capital gains (resulting from the sale of assets held for more than one year), with a top rate of 20%. The Clinton campaign recommends expanding the special tax treatment holding period from one to two years, and gradually reducing the top long-term rate to 20% for assets held more than six years. (This doesn’t include the potential 3.8% net investment income tax or the 4% surtax.) The Trump plan would retain the existing rate structure for capital gains and dividends and repeal the net investment income tax.
Both candidates want to increase tax benefits for child care. Trump’s plan would allow an above-the-line deduction equal to the average cost of child care for the state of residence, with spending rebates for low-income taxpayers through the existing Earned Income Tax Credit. Clinton’s plan would cap child-care expenses at 10% of a family’s income through a combination of subsidized child care and tax credits.
The 2016 federal estate tax exemption is $5.45 million, indexed annually for inflation, and the maximum tax rate is 40%. The Trump campaign proposes eliminating the federal estate tax (which it refers to as the “death tax.” The Clinton campaign proposes rolling back the individual estate tax exemption to its 2009 level, $3.5 million (not indexed for inflation), with a 45% tax rate that gradually increases to 65% for estates exceeding $500 million.
Trump’s plan would reduce the top business tax rate to 15%, assess a 10% one-time repatriation fee on cash held overseas by U.S. companies, and tax future foreign earnings by U.S. subsidiaries.
Clinton’s plan does not address the business tax rate but proposes a new standard deduction that could simplify tax filing for small businesses. Clinton has also indicated that she would introduce provisions to discourage multinational companies from avoiding U.S. taxes, and she would provide tax credits to businesses that hire from apprenticeship programs, offer employee profit sharing, or invest in distressed communities or infrastructure.
Here are three tax-related terms you might hear from the candidates and encounter in the media.
The Buffett Rule. Named after billionaire investor Warren Buffett, who suggested that he and his “mega-rich friends” were not paying their fair share of taxes, this term refers to the tenet that wealthy taxpayers should not pay a smaller share of their income in taxes than middle-income families.
Carried interest. Carried interest generally refers to the compensation structure that applies to managers of private investment funds; it results in the taxation of their compensation at lower long-term capital gains rates. Both campaigns have called for carried interest to be taxed at ordinary income tax rates.
The Romney loophole. The Clinton campaign uses this term to refer to the fact that some high-income individuals have amassed multimillion-dollar account balances in tax-advantaged retirement plans such as 401(k)s and IRAs. Clinton proposes limiting contributions once total account balances reach a specific threshold.
Although you may want to keep an eye on the new president’s tax plans, changing the U.S. tax code is typically a long, arduous process. It would be unwise to make investment decisions based on hypothetical proposals.
These proposals were current as of September 30, 2016.