Presidential Tax Politics

Verbage below is from another article.  use as resource, but draft original material.

Here in the United States, as of this writing, it seemed likely that Republican Donald Trump and Democrat Hillary Clinton will join Libertarian Gary Johnson as their respective party’s nominee for president in the upcoming November election. It’s true that many critically significant policies of the U.S. government will continue, regardless of who is elected: the dollar will continue to be debased, Wall Street will be bailed out after the next financial crisis, and free markets will be blamed for the failures of government intervention. Nevertheless, there are some important variations in the campaign platforms of those vying for the Oval Office that could have a substantial effect on the pocketbooks of individual investors, ceteris paribus. In this special edition, then, we provide our review and analysis of the most significant and relevant public policy prescriptions for investors being advocated by candidates Trump and Clinton. (We’re saving our analysis of the Johnson campaign for the next issue.) Our commentary will be drawn mostly from their official campaign literature, which is considered more reliable because it has been officially vetted and is less susceptible to the fleeting whim of the candidate in the heat of the moment, and because it is not as vulnerable to misinterpretation by the mainstream news media. To a lesser extent, we also reference their public commentary in the months since they announced their candidacies. One caveat: we are assuming for the sake of discussion that each candidate is firmly committed to these positions and will not “flip-flop” on them as nearly every candidate invariably does once becoming elected. Then there is the fact that most presidents have an opposition Congress at some point during their tenure in the White House.

In other words, just because a candidate for president proposes anything in particular and then gets elected, it is by no means a given that proposal will be enacted. All of that being said, then, our detailed review and analysis follows. ♦ Trump’s Proposals Far More Capital Friendly Than Clinton’s It should come as no surprise that Republican billionaire businessman Donald Trump would advance a platform that would be quite friendly to entrepreneurs, savers and investors. Under Mr. Trump’s platform, U.S. taxpayers would get a simpler tax code with four brackets – 0 percent, 10 percent, 20 percent and 25 percent – instead of the current seven. Here are the details: The first bracket would feature an income tax rate of 0 percent and a long-term capital gains/dividends rate of 0 percent. These would apply to single filers who earn up to $25,000, married filers who make as much as $50,000, and heads of households who earn up to $37,500. According to the Trump campaign, that would remove nearly 75 million households – more than 50 percent – from the income tax rolls. The second bracket would be characterized by an income tax rate of 10 percent and a longterm capital gains/dividends rate of 0 percent. Those eligible for this bracket would be single fliers who earn between $25,001 to $50,000, married filers who make between $50,001 to $100,000, and heads of households who earn $37,501 to $75,000. The third bracket would have an income tax rate of 20 percent and a long-term capital gains/dividends rate of 15 percent. These would apply to single filers who earn $50,001 to $150,000, married filers who make $100,001 to $300,000, and heads of household who earn $75,001 to $225,000. The fourth bracket would involve an income tax rate of 25 percent and a long-term capital gains/dividends rate of 20 percent. Taxpayers would fit into this category if they earn $150,001 and more as a single filer, $300,001 and up as a married filer, and $225,001 and more as the head of a household. Some Deductions Rendered Obsolete “With this huge reduction in rates, many of the current exemptions and deductions will become unnecessary or redundant,” the Trump campaign said. Those within the 10 percent bracket would keep all or most of their current deductions. Those within the 20 percent bracket would keep more than half of their current deductions. Those within the 25 percent bracket would keep fewer deductions. Also, charitable giving and mortgage interest deductions would remain unchanged for all taxpayers under the Republican’s plan. “Simplifying the tax code and cutting every American’s taxes will boost consumer spending, encourage savings and investment, and maximize economic growth,” his campaign pointed out. Additionally, Mr. Trump’s new tax code would eliminate the marriage penalty and the Alternative Minimum Tax (AMT) “while providing the lowest tax rate since before World War II.” And it would eliminate the 3.8 percent net investment income tax and treat carried interest as ordinary income On the business side of the equation, the candidate’s plan would reduce the corporate income tax rate to 15 percent, and similarly cap the tax rate on pass-through business income (sole proprietorships, S corporations, limited liability corporations, and partnerships) at 15 percent. That way, “no business of any size, from a Fortune 500 to a mom and pop shop to a freelancer living job to job, would pay more than 15 percent of their business income in taxes. This lower rate makes corporate inversions unnecessary by making America’s tax rate one of the best in the world,” according to his campaign literature. Also, no family would have to pay the so called death tax. “You earned and saved that money for your family, not the government,” according to the Trump 2016 website. “You paid taxes on it when you earned it.”

The candidate went on to say his tax plan is revenue neutral and that his tax cuts are fully paid for in four ways, the first of which would be by reducing or eliminating most deductions and loopholes available to the very rich. He would start by steepening the curve of the personal exemption phase-out and the Pease limitation on itemized deductions. The Trump plan also would phase out the tax exemption on life insurance interest for high income earners. Additionally, it would end the current tax treatment of carried interest for “speculative partnerships that do not grow businesses or create jobs and are not risking their own capital.” The businessman said he also would reduce or eliminate other unspecified loopholes for the very rich. Bring That Cash Home Mr. Trump also proposes a one-time deemed repatriation of corporate cash held overseas at a significantly discounted 10 percent tax rate. “U.S.-owned corporations have as much as $2.5 trillion in cash sitting overseas. Some companies have been leaving [it there] as a tax maneuver,” said his campaign. “Under this plan, they can bring their cash home and put it to work in America while benefitting from the newly lowered corporate tax rate that is globally competitive and no longer requires [stashing capital abroad]. “Other companies have cash overseas for specific business units or activities,” it continued. “They can leave that [capital there], but they will still have to pay the one-time repatriation fee.” The Republican also wants to end the deferral of taxes on corporate income earned abroad. “Corporations will no longer be allowed to defer taxes on income earned abroad, but the foreign tax credit will remain in place because no company should face double taxation,” his campaign said. The businessman also wants to reduce or eliminate corporate loopholes that cater to “special interests,” as well as deductions he says would be rendered unnecessary or redundant by the new lower tax rate on corporations and business income. “We will also phase in a reasonable cap on the deductibility of business interest expenses,” his campaign said. One Economist Opines According to Alan Cole, an economist with the Tax Foundation, Mr. Trump’s tax plan would substantially lower individual income taxes and the corporate income tax and eliminate a number of complex features in the current tax code. “Mr. Trump’s plan would cut taxes by $11.98 trillion over the next decade on a static basis,” he said in a recent analysis. “However, the plan would end up reducing tax revenues by $10.14 trillion over the next decade when accounting for economic growth from increases in the supply of labor and capital.” The billionaire businessman’s proposals would also result in increased outlays by the federal government due to higher interest on the debt, according to Mr. Cole, which would create a 10-year deficit somewhat larger than the estimates above. Citing the Tax Foundation’s Taxes and Growth Model, the economist added, “the plan would significantly reduce marginal tax rates and the cost of capital, which would lead to an 11 percent higher gross domestic product over the long term, provided that the tax cut could be appropriately financed.” Mr. Trump’s plan is also projected to lead to a 29 percent larger capital stock, 6.5 percent higher wages, and 5.3 million more full-time equivalent jobs. “The plan would cut taxes and lead to higher after-tax incomes for taxpayers at all levels of income,” said Mr. Cole. ♦ Clinton’s Proposal Least Friendly to Investors On the other side of the political spectrum, it’s no shock that Democrat contender, former Secretary of State Hillary Clinton, long dubbed her party’s presumptive nominee by the mainstream news media and numerous political pundits alike, is advocating public policy positions that would prove downright painful for many entrepreneurs, savers and investors. Declaring on her campaign website that “the defining economic challenge of our time is raising incomes for hardworking Americans,” the former New York senator and first lady said she wants to reform the U.S. tax code so the wealthiest “pay their fair share.” Mrs. Clinton supports ending the “carried interest” loophole, enacting the “Buffett Rule” that “ensures no millionaire pays a lower effective tax rate than their secretary,” and closing tax loopholes and expenditures that benefit the wealthiest taxpayers in order to pay for her plan to make college affordable and to refinance student debt. On the business side of the equation, she has called for reform that closes corporate tax loopholes and drives investment in the U.S. Her plan would create a 15 percent tax credit for “companies that share profits with workers on top of wages and pay increases.” Mrs. Clinton also indicated she wants to put an end to “quarterly capitalism.” “We need an economy where companies plan for the long run and invest in their workers through increased wages and better training – leading to higher productivity, better service and larger profits,” her campaign said. “Hillary will revamp the capital gains tax to reward farsighted investments that create jobs.” Among other things, Mrs. Clinton wants to address the rising influence of the kinds of “activist” shareholders that focus on short-term profits at the expense of long-term growth. Further, she has pledged to reform executive compensation to better align the interests of executives with long-term value. The Democrat also wants to “impose accountability on Wall Street,” said her campaign. “Nowhere will the shift from short term to long-term thinking be more important than on Wall Street.” Apparently alluding to the Dodd-Frank Wall Street Reform and Consumer Protection Act, her campaign said, “Clinton will defend the Wall Street reforms put in place after the financial crisis – and she’ll go further. She’ll tackle dangerous risks in the financial sector, and she’ll appoint and empower tough, independent regulators and prosecute individuals and firms when they commit fraud or other criminal wrongdoing.” However, the fact that Mrs. Clinton has made tens of millions of dollars in speeches to Wall Street interests has many skeptics doubtful about such promises. Skeptical economic types also note a big disconnect in that the Democrat said she wants to provide tax relief for small businesses, increase private investment and expand employment opportunities. Yet, she also wants to “encourage” companies to share their profits with their employees, expand overtime, raise the minimum wage and support unions and collective bargaining. In an interview in April with the New York Daily News, the candidate estimated her plan would cost about $100 billion a year in additional taxes. That works out to $1 trillion over 10 years. Analysts Weigh In According to an analysis by Tax Foundation Economist Kyle Pomerleau and Senior Fellow Michael Schuyler, the Clinton plan would raise taxes on both individual and business income, but perhaps not as much as the candidate would like. “Hillary Clinton’s plan would raise tax revenue by $498 billion over the next decade on a static basis,” they said in a recent analysis. “However, the plan would end up collecting $191 billion over the next decade when accounting for decreased economic output in the long run.” According to their calculations, a majority of the revenue generated under Mrs. Clinton’s plan would be derived from a cap on itemized deductions, otherwise known as “the Buffett Rule,” and a 4 percent surtax on taxpayers with incomes over $5 million. Further, “Clinton’s proposals to alter the long-term capital gains rate schedule would actually reduce revenue on both a static and dynamic basis due to increased incentives to delay capital gains realizations,” Messrs. Pomerleau and Schuyler pointed out.