Comparing the Tax Reform Proposals of Trump and Clinton
As the 2016 presidential election approaches, the Democratic and Republican candidates are refining and promoting their respective tax reform proposals. While neither candidate is proposing a real fundamental change to our system of taxation, both have put forward recommendations that would significantly impact both individuals and businesses.
As expected, Hillary Clinton’s proposals generally follow those of the current administration, such as using the tax code to extract additional revenues from wealthy taxpayers in order to redistribute income and fund other initiatives. Donald Trump’s proposals follow the traditional Republican approach of reducing tax rates, both for businesses and individuals, in order to stimulate economic growth.
The following is a comparison of the major elements of the two proposals.
Individual Tax Rates
Clinton proposes a 4 percent tax surcharge on “the top 0.02 percent of taxpayers” to the extent that their adjusted gross incomes exceed $5 million. For those with incomes above $1 million, she would install a 30 percent effective tax rate, a version of what has become known as the “Buffett rule.” Clinton’s campaign materials do not describe any changes to the alternative minimum tax (AMT).
Trump proposes the following brackets and rates for married joint filers (brackets for single filers would be one-half of these amounts):
|Less than $75,000||12 Percent|
|$75,000 to $225,000||25 Percent|
|More than $225,000||33 Percent|
Trump proposes to completely eliminate the AMT.
Capital Gains and Dividends
Under Clinton’s plan, taxpayers reporting capital gains held for one to two years would pay their ordinary income tax rate, which currently goes as high as 39.6 percent, just as they do now for gains held less than a year. Gains of two to three years would be subject to a 36 percent rate, and after that, the rate would decline by four percentage points each year until it reached the current long-term rate of 20 percent. Clinton proposes to tax the receipt of carried interests as ordinary income.
The Trump plan would retain the existing capital gains rate structure (maximum rate of 20 percent) within the tax brackets shown above. Trump also proposes to tax the receipt of carried interests as ordinary income.
Itemized Deductions/Personal Exemptions
Clinton proposes to limit the value of itemized deductions to 28 percent for higher-bracket taxpayers. She would also close what the Democrats call the “Romney loophole” by limiting the ability of wealthy taxpayers to shelter income in certain tax-preferred retirement accounts. In lieu of expanding the itemized deduction for medical expenses, she proposes to create a new refundable credit of up to $2,500 for individuals ($5,000 for families) to assist insured individuals facing high out-of-pocket costs for prescription drugs.
The Trump plan would increase the standard deduction for single filers to $15,000 and to $30,000 for joint filers. The personal exemption deduction would be eliminated, as would the head-of-household filing status. In addition, the Trump plan would cap itemized deductions at $200,000 for married joint filers or $100,000 for single filers.
Affordable Care Act
Clinton has expressed her support for the Affordable Care Act (ACA), including retaining additional Medicare tax and expanding the net investment income surtax to business income from pass-thru entities. She has, however, expressed support for repealing the “Cadillac tax” on certain high-cost health plans.
Trump proposes to repeal the ACA, which would include repeal of the additional Medicare tax, the net investment income surtax, the medical device excise tax, and the Cadillac tax.
Child and Elder Care Incentives
Clinton has stated that she will “work to ensure no family pays more than 10 percent of their income on child care by making the Child Tax Credit more generous for working families.” However, she has not yet released any specific proposals to expand tax credits for caregiving expenses.
Trump proposes adding above-the-line deductions for childcare expenses (capped at the average cost of such expenses in the taxpayer’s state of residence), a similar deduction for elder care (capped at $5,000 per year), expansion of the Earned Income Tax Credit, and tax-favored contributions of up to $2,000 per year to Dependent Care Savings Accounts.
Federal Estate Tax
Clinton proposes to reduce the lifetime exclusion to $3.5 million per estate and increase the rate to 50 percent for estates worth more than $10 million, 55 percent for those worth more than $50 million, and 65 percent for those worth more than $500 million, and impose income tax on certain bequests of assets with unrealized gains.
Trump proposes to completely repeal the federal estate tax, but he would tax estates on unrealized capital gains above $10 million. He would disallow contributions of appreciated assets to a private charity established by the decedent or the decedent’s relatives.
Corporate Tax Rates
Clinton’s campaign materials do not describe any specific change to the corporate tax rate. She has called for unspecified measures to “broaden the tax base” in order to lower the rate as a necessary component to being more competitive in the global economy.
Trump proposes to reduce the maximum corporate tax rate to 15 percent and eliminate the corporate AMT.
Clinton proposes to allow small businesses:
- A standard deduction of an as yet unspecified amount.
- Immediate expensing of up to $1 million in new business investment.
- One-hundred percent tax exclusion on capital gains for long-term investments.
- Cash accounting for businesses with gross receipts of less than $25 million.
- A quadrupled limit for deducting startup and organizational costs from $10,000 to $40,000.
Trump’s proposed reductions to the individual and corporate tax rates would benefit owners of small businesses. He would also allow businesses that pay employee childcare expenses to exclude those contributions from income and increase the annual cap for the business tax credit for on-site child care to $500,000 per year.
Business Tax Incentives and “Loopholes”
Clinton proposes a “Manufacturing Renaissance Tax Credit” modeled on the New Markets Tax Credit. She would also allow a $1,500 tax credit for companies that hire apprentices and a larger tax credit if the company hires a “young person.” She would close “tax loopholes” applicable to foreign reinsurance and derivative trading and limit the benefits of like-kind exchanges.
Trump proposes to eliminate all business tax incentives except for the research and development credit. However, he would allow firms engaged in manufacturing in the United States an election to expense capital investment in lieu of deducting corporate interest expense.
International Tax Proposals
Clinton’s campaign materials do not discuss any specific tax proposals relating to the repatriation of foreign profits. However, she has proposed to limit the ability of foreign companies doing business in the United States from engaging in so-called “earnings stripping,” which is essentially the tax-free repatriation for profits out of the United States.
Trump proposes a one-time deemed repatriation of “corporate cash held overseas at a discounted 10 percent tax rate.” Additionally, Trump has proposed to end the deferral of taxes on corporate income earned abroad while retaining the foreign tax credit regime.