The 2016 U.S. Presidential Election: Assessing candidates’ tax reform plans

The 2016 U.S. Presidential Election: Assessing candidates’ tax reform plans

With only months left in the presidential nominating contests for both U.S. political parties, the pool of candidates is down to five. All remaining candidates bring unique tax reform plans to the table — and with each, a new environment of financial risk and opportunity. 

There’s no ideal solution to the imperfect nature of tax policy, and the 2016 U.S. presidential election is no exception. Considering this, it is important to bring clarity to the remaining five candidates’ tax proposals and full array of potential consequences therein.

With some components of each respective plan being more feasible to implement than others, there are useful discussions to be had on which elements of each plan could realistically be put into effect. In an election cycle that has often forgone conventional wisdom, however, it is important to also focus on the impacts of each plan regardless of their likelihood.

Hillary Clinton

Democratic front-runner Hillary Clinton’s proposal would boost federal tax revenues by an estimated $1.1 trillion over a decade, which is 0.5% of GDP. Her proposal does not change ordinary income tax rates or brackets, but it does add a 4% surtax on income exceeding $5 million. She also plans to implement reforms on corporations’ international tax rules, raise estate taxes, and get rid of fossil fuel tax incentives.

The Clinton plan does not propose the sweeping changes that her Democratic opponent or Republican counterparts do. 95% of taxpayers will see little or no tax changes, and the heaviest hit would be on the top 1%. Overall, the plan is fairly well-rounded — the most striking disadvantage being just how complex elements of the policy are. On the other hand, the often-heard rhetoric of “simplifying the tax system” on the GOP side may be an easy sell, but substance can often be lost in streamlining.

Bernie Sanders

Under fellow Democrat Bernie Sanders’ policies, federal revenues are predicted to increase by $15.3 trillion over a decade (6.4% of GDP). The majority of taxpayers will see a modest increase but high-income taxpayers will see more significant changes.

Federal income, payroll, business, and estate taxes would be raised within a newly designed bracket structure to fund and expand government programs such as single-payer health care, paid family and medical leave, free university education, and infrastructure investment. He also plans to impose a phased-in carbon tax from $15/ton to $73/ton in 2035.

One major point of debate on Sanders’ plan is the equal taxing of capital gains and wages, seen as a risk by many economists. According to his campaign, this will reel in $92 billion in revenue per year. Less favorable outcomes are also foreseeable. An increase in the capital gains rate can disincentive selling assets, and a dramatic reduction in sales would cause revenue to fall.

As other analysts have already suggested, however, this does not automatically mean that a high capital gains tax is bad for the economy. In the end, a Sanders tax plan may just reduce the prices at which assets are sold instead of making the sale of assets less likely in general.

Another consideration is that Sanders’ proposal depends on high income-earners’ tax revenue to implement the programs he advocates, but also risks forcing top incomes down as corporate greed is targeted in greater force. Overall, however, the Sanders plan holds up— whether it is good or bad for the economy largely depends on ideology about social programs and wealth distribution.

John Kasich

As for Republican John Kasich, the Tax Policy Center could not provide an estimate for revenue impact as his proposal does not provide enough detail.  That being said, his plan is understood to have comparable revenue and distributional effects as those of Cruz and Trump.

Kasich would lower both individual and corporate income tax rates, establishing three tax brackets with the highest rate at 28%. He also proposes to double research and development tax credits and repeal estate tax. His reforms to counterbalance revenue decline bring opportunity in that they are less extreme than his Republican rivals, but budgetary risks remain with his policy of further increasing military spending.

Ted Cruz

Currently second place in the GOP nomination, Ted Cruz’s tax proposal would lower federal revenues by an estimate of $8.7 trillion over a decade, which is 3.6% of GDP. The Cruz plan advocates establishing a 10% tax rate on all individual income, creating a new 16% broad-based consumption tax, raising the standard deduction and getting rid of many other deductions and credits. In addition, he proposes a repeal of corporate income tax as well as of payroll taxes for Social Security and Medicare, estate taxes and gift taxes.

The Cruz plan would be most beneficial for high-income households. Tax rates for households on the lower end will likely be a little lower, but some estimates suggest that they might also be slightly higher. However, without dramatic government spending cuts or future tax hikes to offset these losses, persistently high and unsustainable deficits in the federal budgets are expected.

Cruz’s Five for Freedom plan seeks to offset the revenue decrease by cutting government agencies. There’s no doubt that many government organizations and their programs are in desperate need of reform— but his proposal to abolish agencies like the Department of Education, the IRS and the Department of Commerce present uncertainties in the operation of the economy in its current form. 

Donald Trump

Leading the Republican pack, Donald Trump’s plan would reduce federal tax revenues by $9.5 trillion over a decade (4% of GDP). He would implement a new bracket structure, decrease individual and business rates, raise standard deduction amounts, and eliminate many credits and deductions. He would also repeal alternative minimum taxes, as well as estate and gift taxes. His proposed tax cuts are steep across the board and disproportionately steep for the very wealthy.

While his plan would raise incentives to work, save and invest, it would also lead to a hike in the national debt by 80% of GDP by 2036 if not accompanied by deep spending cuts. Publicly, Trump has vowed to cut government spending, but has yet to put forth a clear plan to do so.

In short, though it does carry more moderate ideas than his rivals’ plans, there is a consensus among analysts that the numbers do not add up.

The next Democratic debate is scheduled for April 14th in Brooklyn and the next Republican debate is yet to be scheduled, during which more information may be revealed. Until then, more about the candidates tax reform proposals may be parsed from public statements as they continue to articulate their relative merits and risks.

Comparison of U.S. Presidential Candidates’ Tax Reform Proposals

Clinton Cruz Kasich Sanders Trump
Ordinary Income Tax Additional 4% surtax on income exceeding $5mil 10% flat rate, standard deduction increase to $10k 3 brackets; 28% new top rate 2.2% general increase, 4 new brackets (37%, 43%, 48%, 52%) with the highest on income exceeding $10mil 4 new brackets (0%, 10%, 20%, 25%) with the highest on single filer income exceeding $150k and joint filer income exceeding $300k
Itemized Deductions 28% cap on tax benefit of itemized deductions No more itemized deductions except charitable and mortgage interest Plan proposal not specified 28% cap on tax benefit of itemized deductions for households with income exceeding $250k, no more Pease limitation Gradually get rid of itemized deductions except charitable and mortgage interest
Alternative Minimum Tax Establish 30% minimum on income exceeding $1mil No more alternative minimum tax Plan proposal not specified No more alternative minimum tax No more alternative minimum tax
Capital Gains and Dividends Tax Increase medium-term (<6 years) capital gains rates to 24-39.6% Decrease capital gains and dividends rates to 10% Decrease rate on long-term capital gains to 15% Capital gains and dividends rates same as ordinary income for households with income exceeding $250k No more surtax on net investment income
Corporate Income Tax Rate Plan proposal not specified Replace corporate income tax with a 16% business transfer tax applying to capital income and labor payments Decrease top corporate rate to 25% Plan proposal not specified Decrease top corporate rate to 15%
Corporate International Income Tax Tougher inversion laws; “exit tax” on unrepatriated profits Territorial tax system, 10% rate on deemed repatriation of foreign income Establish territorial tax system; permits repatriation of deferred earnings with no tax Eliminate foreign income tax deferral, limit foreign tax credit, reforms on corporate inversions and foreign corporations in US Eliminate overseas corporate income deferral, 10% rate on deemed repatriation of foreign income, does not eliminate foreign tax credit
Payroll Taxes Plan proposal not specified No more payroll tax Plan proposal not specified 6.2% increase on employer-side payroll tax, Social Security payroll tax when earnings exceed $250k, establish 0.2% payroll tax to cover paid family leave Plan proposal not specified
Estate Tax Highest estate tax rate raised to 45%, estate tax exclusion decreased to $3.5mil No more estate tax No more estate tax Highest estate tax rate raised to 65%, estate tax exclusion decreased to $3.5mil No more estate tax
Information sourced from The Tax Policy Center
Categories: Finance, North America

About Author

Eileen Filmus

Eileen has worked in the US Congress, conducted research on terrorism and human rights, worked in the private sector and at NGOs. She specialises in the relationship between technology and geopolitical threat management. She has a Masters degree from University of Chicago, where she focused on security, politics, and diplomacy.