Now that the races are down to a manageable number of candidates, we want to provide some information on their tax proposals (as of May 17th). No political commentary, just an overview to help keep you informed. Although many of these proposals may never become law, they nonetheless provide valuable insight into the underlying principles that will guide tax reform efforts from the next president. Below we discuss a few of the proposals from each candidate. Please view the PDF version to read all the details from each candidate.
Ms. Clinton’s proposals include significant details. Many are identical or at least very similar to changes proposed by President Obama over the past few years:
Individual tax reform. Ms. Clinton would reform individual taxes by
. . . Imposing the “Buffett rule” requiring taxpayers earning more than $1 million per year to pay at least 30% in taxes, and “broadening the base of income subject to the rule.”
. . . Enacting the “Fair Share Surcharge”-i.e., an extra 4% surtax on taxpayers who make more than $5 million per year.
. . . Cutting taxes for “hard-working families.”
. . . Establishing a 20% “caregiver credit” to help taxpayers offset up to $6,000 in caregiving costs (for a maximum credit of $1,200) for their elderly family members.
Business tax reform. Ms. Clinton’s business tax proposals include:
. . . Restricting corporate inversions by increasing, from 20% to 50%, the post-merger threshold of foreign shareholder ownership for an American company to be considered foreign.
. . . Imposing an “exit tax” on companies that undergo an inversion to ensure that U.S. taxes are paid on unrepatriated earnings held overseas.
. . . Creating a $1,500 “apprenticeship tax credit” for every new worker that a business trains and hires.
. . . Providing for a new 15% tax credit for employers that share profits with their workers.
While it now appears clear that Mr. Sanders will not secure the Democratic nomination, many of his policies have been widely embraced by the Democratic voter base. As a result, some of those policies may eventually end up as part of Ms. Clinton’s proposals:
Individual tax reform. Mr. Sanders would leave the existing rates in place for married couples with income below $250,000 and single filers with incomes below $200,000. However, he would replace the existing top three rates (of 33%, 35%, and 39.6%) as follows:
. . . 37% on income between $250,000 and $500,000;
. . . 43% on income between $500,000 and $2 million;
. . . 48% on income between $2 million and $10 million; and
. . . 52% on income of $10 million and above.
Mr. Sanders would also replace the alternative minimum tax (AMT), personal exemption phase-out (PEP), and “Pease” limitation on itemized deductions with a provision limiting the tax savings for each dollar of deductions to 28¢ for “high-income households.”
In addition, he would repeal the favorable rates on capital gains and dividends for married couples with incomes over $250,000 (which would instead be subject to the otherwise applicable income tax rates noted above), while retaining the existing favorable treatment for taxpayers who fall under that threshold. He would also increase the 3.8% surtax on net investment income to 10%.
Business tax reform. Mr. Sanders’ tax plan would:
. . . End deferral of foreign-source income, instead requiring corporations to pay U.S. taxes on offshore profits as they are earned.
. . . Not allow a corporation to “claim to be from another country” if its management and control operations are primarily located in the U.S.
. . . Prevent American companies from using corporate inversions to avoid U.S. taxes by treating a corporation as American for tax purposes if it is still majority-owned by U.S. interests.
. . . Not allow U.S. corporations to “artificially inflate or accelerate foreign tax credits” by limiting foreign tax credits to offset income only from the country in which it is earned.
. . . Eliminate favorable tax provisions and subsidies that benefit oil, natural gas, and coal interests.
Mr. Trump has not yet provided a significant amount of detail. Without speculating, highlights of his plans thus far include:
Individual tax reform. The individual tax rates under Mr. Trump’s tax plan would be:
. . . 0% for single filers earning up to $25,000, married filers earning up to $50,000, and heads of household earning up to $37,500;
. . . 10% for single filers earning $25,001 to $50,000, married filers earning $50,001 to $100,000, and heads of household earning $37,501 to $75,000;
. . . 20% for single earners earning $50,001 to $150,000, married filers earning $100,001 to $300,000, and heads of household earning $75,001 to $225,000; and
. . . 25% for single filers earning $150,001 and up, married filers earning $300,001 and up, and heads of household earning $225,001 and up.
According to Mr. Trump’s website, with these reductions in rates, “many of the current exemptions and deductions will become unnecessary or redundant.” His plan also calls for “steepening the curve” of the “PEP” and “Pease” limitations. Taxpayers in the 10% brackets would keep “all or most” of their current deductions, those in the 20% bracket would keep “more than half” of their current deductions, and those in the 25% bracket would keep “fewer” deductions. Two of the most popular deductions, charitable giving and mortgage interest deductions, would remain unchanged for everyone. Mr. Trump would also allow individuals to fully deduct health insurance premium payments.
Business tax reform. Mr. Trump’s tax plan would cut the corporate tax rate to 15% and also create a new “business income tax rate” within the personal tax code (i.e., because pass-through entities are subject to taxation under individual rates) that would match the 15% corporate tax rate for pass-through businesses and freelancers.
Other business tax reforms include:
. . . Providing a one-time deemed repatriation of corporate cash held overseas at a 10% rate.
. . . Ending deferral of taxes on corporate income earned abroad.
. . . Reducing or eliminating corporate deductions that “cater to special interests,” as well as “deductions made unnecessary or redundant” by the new lower rates, and phasing in a “reasonable cap” on the deductibility of business interest expenses.