Understanding Hillary Clinton’s Tax Plans

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Democratic presidential candidate Hillary Clinton has vowed that she will make sure the wealthy and the largest firms will be paying their fair share while providing tax relief to working families. According to her, the economy should work for everyone and not just at the top of the food chain. She has committed to restoring fairness in the US tax code, vowing to create more jobs in the US and make the economy more competitive in the long haul.

Clinton has pledged to do the following:

  • Restore fairness to the US tax code by implementing a ‘fair share surcharge’ on multi-millionaires and billionaires. He will also champion for measures such as the Buffett Rule in a bid to ensure that the richest citizens in the country won’t be paying a lower tax than middle-class families.
  • She has also assured that her administration will close loopholes in the current tax code so that multi-million dollar estates will be paying their fair share of taxes.
  • Put a stop to corporate and Wall Street tax loopholes such as inversions that reward firms for shifting profits and bringing in jobs overseas. She has stated her desire to charge companies that leave the US, levying an exit tax on those firms that get away with untaxed foreign earnings.
  • She also said that she will be closing tax loopholes that allow Wall Street money managers to pay lower taxes than some middle-class households. And under the Clinton administration, businesses that bring in much-needed jobs in the US will be given lower taxes.
  • Simplify taxation for small firms to encourage the growth of micro, small, and medium enterprises. In turn, these firms can grow and hire more people. In particular, she is setting sights on freeing small businesses with 1-5 employees that spend more than a thousand dollars on federal tax compliance. According to her, that is more than 20 times higher than the average for bigger companies.
  • Provide tax relief to working families and shield them from the rising costs of day-to-day living. She has particularly offered tax relief for Americans who are facing excessive out-of-pocket health care expenses as well as those who are taking care of an elderly or ill family member.

A Closer Look at Clinton’s Tax Plans

Here are the major points of Clinton’s tax plans:

  • Charging a 4% surtax on adjusted gross income or income earned over $5 million. This proposal would affect the so-called high-income taxpayers or roughly one in every 5000 taxpayers. In the long run, it is expected to raise around $150 billion in tax revenue for the federal government.

However, the income tax rates for individuals, married taxpayers, and heads of households earning less than $5 million a year will not be affected or changed at all.

  • The imposition of the so-called Buffett Rule that would call for a 30 percent minimum tax on taxpayers who have an adjusted gross income of more than $1 million.

To the uninitiated, the Buffett rule was coined by outgoing US President Barrack Obama who had noted of billionaire Warren Buffett’s criticism of current tax policies.  In 2011, Buffett wrote that he had paid lower tax rates than his secretary.

According to Clinton, the imposition of the Buffett Rule would be one that would help the nation achieve greater fairness in its tax system.

  • Raising capital gains taxes on high-income investors. High-income fliers, or those who are earning more than $400,000 make a lot of money from capital gains. In the current tax code, these high-income investors pay a 20 percent tax on realized gains from investments that were held more than a year. Clinton is amenable to preserving the rate but only for investments that were for a minimum of six years. She bats for investments that were held less than six years to be taxed on a sliding scale. This would encourage investors to think long term as they have a tax incentive to hold onto an investment.
  • Raise tax rates on big estates. If Clinton gets elected, expect money and assets left to heirs to be tax heavily if these come from a big estate. She also wants to tax estates worth more than $3.5 million, and $7 million for married couples. These are far lower than today’s estate tax exemption level of $5.45 million for individuals and $10.9 million for couples.
  • She also wants the estate tax rate to be slashed to 40 percent from 45 percent.

For business taxes, Clinton wants the following:

  • The standard deduction for small businesses
  • Raise the limit for foreign ownership in inversion transactions to 50 percent of combined company shares from the current 20 percent
  • Impose a corporate exit tax on unrepatriated corporate earnings
  • Tax high-frequency trading although the rate is still to be determined
  • Provide tax credits for investments in community development and infrastructure
  • Reform performance-based tax deductions for top-earning executives of public firms
  • Eliminate tax incentives for fossil fuels

Impact of Higher Tax on High-Income Earners

The nonpartisan Tax Policy Center estimates that taxpayers in the upper echelon would have to deal with an average tax increase of $4,527, representing a 1.7 percent reduction in after-tax income. Those who have incomes in the $295,000 and $732,000 range would have to pay $2,700 more in taxes. Those in the 0.1 percent with income greater than $3.8 million will also have their taxes increase to about $520,000.

The four percent surcharge that Clinton is proposing stems from a report by the IRS that in 2013, the 400 top income payers paid an effective tax rate of 23 percent brought about by lower rates on capital gains and other tax loopholes.

Not surprisingly, the bottom 95 percent of the taxpayers will not see any changes to their taxes. The Tax Policy Center says that if Clinton’s tax proposals are enacted, this would translate to an increase in revenue by about $1.1 trillion over the next decade.

The Tax Policy Center also notes that almost 80 percent of tax increases in a Clinton administration would affect only 1 percent of the population in the first decade. One in the 1 percent would owe as much as $120,000 more while the poorest citizens would owe $6 more.

But the Tax Foundation, a top independent tax policy research organization, sees Clinton’s plans as having a detrimental impact on the economy. In the long run, it could reduce the economy’s size by 1 percent according to the foundation’s Taxes and Growth Model.  It is also projected to lead to nearly 1 percent lower wages and 311,000 fewer jobs as well as 2.8 percent smaller capital stock.  The foundation states that these are a result of higher marginal tax rates on labor income and capital.

The National Center for Policy Analysis’ Tax Analysis Center supports those claims of the Tax Foundation. In backing up the claims of the Tax Foundation, the NCPA says that the tax plan of Clinton will also hurt other taxpayers and not just the rich contrary to what her drumbeaters are saying.

A study conducted by NCPA senior fellow Dr. David Tuerck shows that while federal tax revenues would increase if Clinton’s tax plans are implemented it can also affect the income of the general population.

In the said study, the top 10 percent of income earners would lose almost 2 percent of their broadly measured income in 2017. Moreover, the poorest 10 percent of the population will be lost around 0.7 percent of their broadly measured income which is the largest loss among the bottom 90 percent of the population.

The study points out that taxing high-income earners can slow down economic growth, which can hurt even the lowest income earners.

Taxes on Small Businesses

Clinton says she is proposing a scheme called “checkbook accounting” that will make filing taxes for small firms as simple and easy as keeping a checkbook or printing out a bank statement.

The standard deduction for small businesses is designed to allow small businessmen to take a standard deduction instead of tracking expenses like rent, phone bills, and office supplies. There’s still no specific amount of percentage discussed, as this would be up to Mrs. Clinton’s treasury department to refine the idea.

Many observers think that the idea will help businesses because it would be much simpler for them to file taxes. It is also seen to provide a net benefit to small firms as they can still choose to list all their deductions, and as such, any firm will be able to choose the option most favorable to them.

However, others point out that the benefits of this tax proposal aren’t that big for small firms. Most firms today rely on technology such as apps to track their expenses. They also use those files for filing their taxes.

Capital Gains Taxes Impact on investors

Clinton’s tax proposals will also have an effect on investors in the country. As mentioned earlier, Clinton is batting for six capital gains taxes, with longer holding periods getting the lowest levy.

Clinton believes that by encouraging shareholders to hold on to their assets for the long haul, companies will be able to engage in moves that create long-term value like investing more in employees and raising wages instead of buying back shares.

The Tax Policy Center estimates that Clinton’s plan to increase capital gain taxes on investments held for shorter than six years would raise around $84 billion over a decade. This is assuming there will be little changes in investing patterns.

But the Tax Foundation says those plans will reduce tax revenues as it would push investors to hold on to their holding a lot longer.  The organization says that this proposal would likely result in a loss of around $375 billion on a static basis, as it can reduce the number of capital gains realizations.

The mutual fund industry is expected to be hit by Clinton’s capital gains tax proposal. If Mrs. Clinton’s plan pushes through, the belief is that investing in ETFs will become more popular than actively managed funds which have a 2-3 year time horizon.

Impact of Exit Tax on Companies

Another pillar of Clinton’s tax program is charging expatriating US firms an ext tax based on their offshore earnings. Clinton’s explanation is simple – “if they (companies) want to go, they have to pay to go.”

Clinton wants firms that have their tax residency moving to a non-U.S. jurisdiction to immediately pay its corporate income tax on overseas income that it has deferred.  The concept is basically asking for corporate exiters to pay before they escape.

This proposal is seen to counter the move of many US firms to shift their tax jurisdiction out of the US, which has the highest corporate tax rate at 35 percent. If this proposal comes into being, firms will face penal provisions for shifting tax residency abroad to leverage tax advantages.

Interestingly, this is an issue that is seen to protect the interests of US workers which Clinton’s rival Donald Trump has also championed by blasting trade deals like the North American Free Trade Agreement.

Conclusion

While Clinton’s tax plans appear to cater to the majority of US taxpayers, the consensus of many experts is that it would be detrimental to the economy in the long run. Although most of her policies except for the capital gains policy would likely raise tax revenue, organizations like the Tax Foundation believe that her plans will impose higher marginal tax rates on capital and labor income. This can then result in a slowdown in the US economy in the long run. This detrimental effect on the US economy will overshadow the revenue that Clinton’s tax policies could collect.

Indeed, Clinton’s tax plans appeal to a larger part of the population but a closer examination of her tax program reveals that there is still a lot to be improved on.


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