How do this year's presidential hopefuls plan to spend your tax money? Here's the breakdown.
There's no denying that this presidential race has been more…entertaining, shall we say?…than a lot of past ones.
But to be honest, all the extra noise in this year's primary barely registers with me. As an accountant, when I listen to speeches I'm not listening for buzzwords like “hope” and “equality,” and I'm definitely not counting how many handfuls of mud each one slings at each other.
What I'm listening for is the money.
As I've said before on this blog, every presidential campaign promise comes with a price tag attached.
[Tweet “Every presidential campaign promise comes with a price tag attached. #Election2016 #TheBottomLine”]When somebody says they're going to “strengthen the military,” I know that means an increase in taxes.
When they say that they're going to build better schools, there's a tax behind that, too.
When somebody says they're going to cut taxes, I just laugh. Partly because “cutting taxes” always translates to more deficit spending, but mainly because it just never happens. (Remember this?)
The Breakdown of Frontrunner Candidates' Tax Proposals
You may have missed it (thanks to all the grandstanding and mudslinging we've enjoyed for the past eight months), but early in the race many candidates had launched their campaigns with proposed revisions to the US tax code. Some had gone so far as to stake their claim on wholesale tax reform plans.
Despite ringing the bells that audiences of every stripe like to hear–tax relief for the middle class, simplification of the tax code, lowering business tax, etc.–these plans were wildly different from each other.
Here's what they broke down:
Trump
Trump has promised to reduce the number of individual tax brackets from seven to four – zero, 10, 20, and 25 percent – with the top 25 percent rate applying to taxable income of more than $150,000 for single filers and $300,000 for joint filers. (Analysts agree that while these proposals would lower rates across the board, these changes to tax code would mainly benefit people in the highest and lowest income brackets.)
In addition, Trump says he would eliminate the alternative minimum tax, the net investment income surtax, and the estate tax. He'd also cap the tax rate for long-term capital gains and dividends at 20 percent, and phase out all deductions and loopholes except for the charitable giving and mortgage interest deductions.
As for small businesses, Trump proposes taxing pass-through business income at a flat 15 percent rate.
Sanders
Senator Sanders is famous for proposing to deliver tax relief for the middle class and low-income earners, which would be offset by shifting a greater portion of the tax burden onto the wealthy.
His proposals include increasing the net investment income surtax from 3.8 percent to 10 percent, raising the top estate tax rate to 65 percent while lowering the estate tax exclusion to $3.5 million.
He's also promised to tax Wall Street speculation–which means charging stock market traders a small fee for every stock, bond or derivative sold in the United States–and using it to fund free tuition at state colleges and universities.
Cruz
Senator Cruz has been very open about his intention to abolish the IRS. No more payroll taxes, corporate tax, estate tax, gift tax or alternative minimum tax. Instead, he wants to create a “simple flat tax” of 10% for individuals. For businesses, he proposes a controversial Value Added Tax somewhere between 16-19% on business' net revenue.
While his two-part plan would result in a tax break for most Americans (with those earning in the top 20% enjoying nearly 80% of the break), analysts caution that it would also result in the business tax being passed on to consumers.
As for the “deficit spending” effect of all this simplification, Cruz says he'd cut down on spending to make up for it. Picture shutting down the military or eliminating Medicare, and you'll get an idea of how big those cuts would have to be.
Clinton
Secretary Clinton has stated her intention to raise rates on medium-term capital gains, maintaining that extending the holding period will spur long-term economic growth. She also expressed support for something called the “Buffett rule,” a minimum tax rate of 30 percent on individuals making more than $1 million, as well as a provision to raise the tax rates on medium-term capital gains (investments held for less than six years) from the current 20 percent to between 24 percent and 39.6 percent.
Recently, she promised to “crack down” on inversions–the trend for American corporations to reincorporate offshore to avoid American taxes.
What Do the Analysts Say?
Obviously, these are just the broad-strokes; there is a lot more to digest about what these candidates propose in regard to the tax code.
But as you're taking it all in, keep these two principles (courtesy of expert tax analysts) in mind:
- Comprehensive tax reform would likely benefit businesses and the overall economy. But the greatest complexity in the tax code lies on the business level. In the words of one CPA, “even experts with 25 years of experience are making errors…nobody can keep all the rules straight.” And unfortunately for the increasing number of small business owners, candidates (and elected leaders) often ignore business tax reforms in favor of addressing the individual tax code.
- It’s difficult to offer little more than a speculative assessment of any candidate’s proposal during a primary–the “plans” they are offering are very basic and incomplete. At this point in the game, candidates are much more interested in telling you about themselves than about their tax plans.
The Bottom Line
As we approach the grand finale of this tumultuous primary season, I'd urge you to keep an ear open in the midst of the rhetoric, the soapboxing and the mudslinging.
Instead, listen for the money. After all, if you're going to be paying for it, you'd better really believe in it.
When you hear a candidate that you love (or hate) promising to get something done, especially where taxes are concerned, take a quick time-out to do a little research:
- What do analysts say could be the effects of these proposals, in the long term as well as the short term?
- Have versions of these tax plans been proposed before? (Hint: most of them have!)
- For every dollar that is cut from one federal program, where does the candidate plan to make up the difference in the federal budget?
- How big is the national debt projected to be in a few years, if one of these plans is put into action?
Answering these questions takes a little more time than just, say, turning on the news. But it will make you tremendously more powerful as a voter.
