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Presidential Candidates Update Tax Plans but Questions Remain

Posted on September 26, 2016 by Curry, JonathanMoroses, Dylan F.

Hillary Clinton's list of tax-the-rich policies grew longer September 22 with the release of additional details on a beefed-up estate tax, changes to stepped-up basis, and an assortment of proposals designed to raise taxes on high-income individuals.

Meanwhile, the details of the middle-income tax cuts the Democratic presidential nominee has promised to release continue to prove elusive, as have some aspects of Republican presidential nominee Donald Trump's plans for business taxation.

Under Clinton's revised plan, the estate tax would now have progressive tax brackets for estates with higher values, with a top estate tax rate of 65 percent for estates valued at more than $1 billion per couple, according to the campaign's updated fact sheet on her plan to restore "tax fairness."

Along with her previous call for returning the estate tax to its 2009 levels, which the fact sheet still lists as part of her platform, the estate tax rates would range from 45 to 65 percent, with the estate tax exclusion reduced to $3.5 million for individuals, or double that for couples.

A September 22 analysis of Clinton's tax plans by the Committee for a Responsible Federal Budget breaks down Clinton's brackets by keeping the 2009 estate tax levels as the baseline, and then adding tax rates of 50 percent for estates valued up to $10 million and 55 percent over $50 million. An additional 10 percent tax would be applied to estates valued at over $500 million for individuals, or $1 billion for married couples. The Committee for a Responsible Federal Budget notes that Clinton supports the estate tax increases proposed by her primary opponent, Sen. Bernie Sanders, I-Vt., who set those rates.

Clinton also proposes going after large inheritances by closing the stepped-up basis "loophole" that allows capital gains taxes on assets like stocks and bonds to be based on the asset's value at the time of the donor's death, not when it was originally purchased, enabling capital gains to go untaxed for years. (Prior coverage: Tax Notes, Feb. 1, 2016, p. 506.) Under Clinton's plan, bequests would be treated as a realization event, forcing capital gains taxes to be applied when the assets are passed to the heirs. However, the change to stepped-up basis would be limited to high-income taxpayers, and it would include "careful protections and flexibility for small and closely-held businesses, farms and homes, and personal property and family heirlooms," according to the fact sheet.

The fact sheet also notes that Clinton would impose limits on the benefits of like-kind exchanges to ensure and "rationalize . . . the net investment income tax to prevent gaming by high-income taxpayers."

Clinton previously said she would raise taxes on the wealthy by imposing a minimum tax of 30 percent on taxpayers with AGI over $1 million, imposing a 4 percent surcharge tax on individuals making more than $5 million annually, and eliminating a variety of tax breaks typically used by high-income taxpayers. (Prior coverage: Tax Notes, June 20, 2016, p. 1626.)

A Trump campaign spokesperson criticized Clinton's new tax plan as "tax hypocrisy" in a September 22 statement, claiming that Clinton's call to raise the estate tax rate comes "at the same time she uses exotic tax loopholes reserved for the very wealthy to exempt her Chappaqua estate" in New York.

Middle-Income Earners

Throughout the campaign, Clinton has said she wants to lower taxes on middle-income taxpayers, which she defines as those earning less than $250,000 per year. And while Clinton has released an ambitious series of proposals to raise taxes on high-income taxpayers, her plan to cut taxes on middle-income earners is less clear.

"I am convinced that raising incomes for hardworking families is the number one job for the economy," Clinton said in a November 20, 2015, speech in Memphis, Tennessee. "That's why I believe you deserve a raise increase, not a tax increase, and I'm not going to stand for that."

In an August 11 speech in Warren, Michigan, on creating jobs and boosting the economy, Clinton contrasted her tax plan with Trump's. "Now, it's true that both of us have proposed to cut taxes for middle class families," Clinton said. But "one of the differences between Donald Trump and me is I'm telling you what I will do, I'm laying out my plans, and I will stand by them, and I want you to hold me accountable for delivering results." (Prior coverage: Tax Notes, Aug. 15, 2016, p. 945.)

Clinton has provided some details on middle-income tax breaks, including a 20 percent tax credit on up to $6,000 in caregiving expenses to help families pay for the expense of caring for elderly or disabled family members and a refundable tax credit of up to $5,000 for families with excessive out-of-pocket healthcare costs. She also proposed a permanent extension of the American opportunity tax credit, although the credit has since become permanent through the December 2015 tax extenders law (P.L. 114-113). (Prior coverage: Tax Notes, Nov. 30, 2015, p. 1125; and Tax Notes, Sept. 28, 2015, p. 1439.)

Clinton has also spoken about expanding the child tax credit and reducing child care costs through tax credits, although she has not provided details about those proposals. (Prior coverage: Tax Notes, Sept. 5, 2016, p. 1354.)

But the Clinton campaign has hinted for months that it would release a broader tax cut plan for middle-income earners at some point. A March 3 analysis by the Urban-Brookings Tax Policy Center says the Clinton campaign told the center that it would release "a tax cut for low- and middle-income households later in the campaign." (Prior coverage: Tax Notes, Mar. 7, 2016, p. 1085.)

For now, though, an August 8 post on Clinton's campaign website says that she wants to cut taxes for middle-income taxpayers by providing tax breaks "to help families cope with the rising cost of everyday expenses, like child care and education."

The Clinton campaign did not respond to Tax Analysts' requests for comment.

The $1.3 Trillion Question

Meanwhile, the Trump campaign continues to dodge questions on how exactly passthrough entities would be taxed under the revised version of his tax plan.

When Trump announced the third iteration of his tax reform plan in a September 15 speech, there was widespread confusion over whether passthrough businesses would be able to claim the 15 percent business tax rate he originally proposed. Different groups were reportedly given different answers by the campaign, with the National Federation of Independent Business saying it was told the 15 percent rate would apply to passthroughs, while others, like the Tax Foundation, reported being told it would apply only to corporate entities.

A September 16 release by the Trump campaign said the 15 percent business tax rate would be available to both small and large businesses but did not define them. (Prior coverage: Tax Notes, Sept. 19, 2016, p. 1653.)

Because of the continued confusion, the Tax Foundation released an analysis of Trump's plan September 19 that provided a range based on either outcome. According to the analysis, over the next 10 years the plan would cost $2.6 trillion on a dynamic basis if passthroughs are not able to claim the business rate and $3.9 trillion if they can -- a $1.3 trillion difference.

Politico reported that the campaign confirmed September 21 that all businesses can pay the 15 percent rate and passthroughs would be given the option to elect to pay at the individual income tax rate. Large passthrough businesses that choose to elect to pay the business tax rate would face dividend taxes, while small passthroughs would be exempt from that second layer of tax.

That would confirm the campaign release that was posted briefly the morning of September 19 on the Trump campaign website before getting pulled.

Trump Cleans Up Plan

Trump announced a revised version of his tax plan September 15 during a speech in New York that made significant changes to his original plan on individual and business income taxation, such as offering a more modest standard deduction and imposing a cap on itemized deductions for wealthier taxpayers.

The Tax Foundation said its analysis gives a range based on that uncertainty using "the two most extreme possible assumptions regarding current pass-through businesses." The higher-end revenue loss estimate is attributed to passthroughs being taxed solely at the proposed 15 percent business income rate; the revenue loss would be less if they are taxed at Trump's proposed individual income rates, which have a top rate of 33 percent, according to the analysis.

But the actual cost of Trump's tax plan lies somewhere in the middle of those two ranges, the analysis says. "[Our] best understanding of the Trump proposal, after examining the totality of all statements made by the campaign, is that passthroughs are not eligible for a single 15 percent tax rate on the individual income that their owners report," the Tax Foundation said. "At best, they may be allowed to adopt some kind of tax status similar to that of C corporations, either on a temporary or permanent basis. . . . However, we also acknowledge the arguments of those who perceive things differently."

The Tax Foundation estimates that Trump's new plan would cost substantially less than the $10.14 trillion the group estimated for the original plan. The analysis does not account for how the revenue loss would be offset with spending cuts, and it does not consider the economic effects of policy proposals on nontax issues, such as trade or spending.

Trump's tax plan would boost U.S. GDP beyond current projected baseline growth over the next 10 years by 6.9 percent if passthroughs are taxed only at the business income rate and by 8.2 percent if they are taxed at individual income tax rates, according to the analysis. Similarly, investment would grow between 20.1 and 23.9 percent, wages would grow between 5.4 and 6.3 percent, and between 1.8 million and 2.16 million more full-time jobs would be created. The corporate tax reforms Trump proposes would be the main driver of economic growth, providing 4.5 percent of the boost to GDP "because the U.S. corporate income tax reduces economic output more than other taxes do," the analysis says.

After-tax incomes would increase for all taxpayers under either the static or dynamic score, although the share of the increase would still be notably higher for taxpayers in the top quintile and especially so for those in the top 1 percent of earners. The highest earners would see their after-tax incomes rise by up to 19.9 percent under the most generous dynamic estimate, whereas those in the bottom two quintiles would see an 8 percent increase. Under a static estimate, the top 1 percent would see a 16 percent gain, and the bottom two quintiles would get only a 1 percent boost.

Peter Navarro, a senior adviser to the Trump campaign, praised the Tax Foundation's analysis and called it "great news" for unemployed Americans and those who have seen their incomes stagnate. He said the analysis shows that Trump's economic policies are close to revenue neutral.

"Our own internal analysis forecasts a roughly $2 trillion positive revenue contribution or 'offset' from the trade, regulatory, and energy policy reforms in the broader Trump economic plan," Navarro told Tax Analysts. "Together with proposed spending cuts, the fiscally conservative Trump plan approaches revenue neutrality."

Matthew Gardner of the Institute on Taxation and Economic Policy said one of his primary concerns with the Tax Foundation's analysis is that it is limited to tax policy and fails to account for other major economic drivers. "When you ignore one-half of the fiscal policy equation, there's no more obvious way to put your thumb on the scale and get into these economic policy outcomes," he said.

Gardner criticized the analysis for relying on the assertion that "tax hikes always hurt, tax cuts always help," which he said ignores the positive economic effects of spending on infrastructure and education. His organization's analysis of Trump's new tax plan will be released soon, he added.

Kyle Pomerleau of the Tax Foundation acknowledged that evaluating only tax proposals misses the economic effects of other types of policies but said that doesn't negate the value of analyzing tax proposals. "It matters how the tax system is structured. . . . Everything else does matter, but we are answering one question, which is how does tax policy impact the economy in distribution and revenue," he said.