[IMGCAP(1)]The end of the 2016 primary season is in sight, and while many significant (and some less significant) issues have received ample attention, taxes have played a somewhat less prominent role.
This article examines the tax plans of the last three candidates standing. These proposals provide valuable insight into the underlying principles that may guide tax reform efforts from the next President.
This article is based largely on information provided on the candidate's websites as of May 17, 2016 and is not an endorsement of any candidate’s position.
Individual tax reform. Clinton would reform individual taxes by:
• Imposing the "Buffett rule" requiring taxpayers earning more than $1 million per year to pay at least 30 percent in taxes and "broadening the base of income subject to the rule."
• Enacting the "Fair Share Surcharge"—i.e., an extra 4 percent surtax on taxpayers who make more than $5 million per year.
• Cutting taxes for "hard-working families."
• Establishing a 20 percent "caregiver credit" to help taxpayers offset up to $6,000 in caregiving costs (for a maximum credit of $1,200) for their elderly family members.
• Modifying the treatment of capital gains for taxpayers in the highest bracket by implementing a graduated holding period where the rate decreases, from 39.6 to 20 percent, over a six-year period, to promote long-term investment.
• Limiting the tax value of certain tax breaks to 28 percent.
Business tax reform. Clinton's business tax proposals include:
• Restricting corporate inversions by increasing, from 20 to 50 percent, the post-merger threshold of foreign shareholder ownership for an American company to be considered foreign.
• Imposing an "exit tax" on companies that undergo an inversion to ensure U.S. taxes are paid on unrepatriated earnings held overseas.
• Cracking down on earnings stripping.
• Creating a $1,500 "apprenticeship tax credit" for every new worker that a business trains and hires.
• Providing for a new 15 percent tax credit for employers that share profits with their workers.
• Creating tax incentives to encourage investment in communities that have faced (or are about to face) significant manufacturing job losses.
• Simplifying tax filing and providing targeted tax relief for small businesses.
• Modifying and reauthorizing the "Build America Bond" program.
• Imposing a risk fee on large banks and financial institutions (generally, those with more than $50 billion in assets and/or which have been designated by regulators for "enhanced oversight").
• Imposing a tax on high-frequency trading.
• Ending "wasteful tax subsidies" for oil and gas companies.
Estate tax reform. Clinton would modify the estate and gift tax system by:
• Exempting the first $3.5 million of an individual's estate from estate tax ($7 million for married couples), without adjustment for inflation.
• Increasing the top rate to 45 percent.
• Capping the lifetime gift tax exemption at $1 million.
Miscellaneous tax reforms. Other tax reform proposals of Clinton include:
• Providing a tax credit of up to $5,000 (per family) for consumers buying health coverage on Affordable Care Act exchanges, to offset a portion of out-of-pocket and premium costs above 5 percent of their income.
• Enhancing the premium tax credit so that taxpayers eligible for it will pay less of a percentage of their income than under current law, and ensuring that families purchasing on the exchange won't spend more than 8.5 percent of their income for premiums, and fixing the "family glitch" (i.e., under which affordability of employer-provided care is determined at the individual level despite the fact that family plans often cost significantly more).
• Ending the "carried interest" loophole (under which private equity and hedge fund managers are taxed at capital gains rather than ordinary income rates on fund income).
• Preventing tax avoidance by closing the "Bermuda reinsurance" loophole (essentially, a way to divert investment income to an insurance company set up in a low-tax jurisdiction like Bermuda).
• Closing the loophole under which taxpayers essentially avoid IRA contribution limits by undervaluing contributed assets, and preventing taxpayers with "mega IRAs" from contributing further.
• "Asking the wealthiest to contribute more" to Social Security, including "options to tax some of their income above the current Social Security cap, and taxing some of their income not currently taken into account by the Social Security system."
Individual tax reform. Sanders would leave the existing rates in place for married couples with income below $250,000 and single filers with incomes below $200,000. However, he would replace the existing top three rates (of 33, 35 and 39.6 percent) as follows:
• 37 percent on income between $250,000 and $500,000;
• 43 percent on income between $500,000 and $2 million;
• 48 percent on income between $2 million and $10 million; and
• 52 percent on income of $10 million and above.
Sanders would also replace the alternative minimum tax (AMT), personal exemption phase-out (PEP), and "Pease" limitation on itemized deductions with a provision limiting the tax savings for each dollar of deductions to 28¢ for "high-income households."
In addition, he would repeal the favorable rates on capital gains and dividends for married couples with incomes over $250,000 (which would instead be subject to the otherwise applicable income tax rate), while retaining the existing favorable treatment for taxpayers who fall under that threshold. He would also increase the 3.8 percent surtax on net investment income to 10 percent.
Business tax reform. Sanders' tax plan would:
• End deferral of foreign-source income, instead requiring corporations to pay U.S. taxes on offshore profits as they are earned.
• Not allow a corporation to "claim to be from another country" if its management and control operations are primarily located in the U.S.
• Prevent American companies from using corporate inversions to avoid U.S. taxes by treating a corporation as American for tax purposes if it is still majority-owned by U.S. interests.
• Close loopholes that allow U.S. corporations to "artificially inflate or accelerate foreign tax credits" by limiting foreign tax credits to offset income only from the country in which it is earned.
• Eliminate loopholes and subsidies that benefit oil, natural gas and coal interests.
Estate tax reform. Sanders would significantly reform the estate tax by:
• Exempting the first $3.5 million of an individual's estate from the estate tax.
• Establishing a new progressive estate tax rate structure: 45 percent on the value of an estate between $3.5 million and $10 million; 50 percent for the value of an estate between $10 million and $50 million; and 55 percent for the value of an estate in excess of $50 million, with an "additional billionaire's surtax" of 10 percent.
• Strengthening the generation-skipping transfer tax by applying it with no exclusion to any trust set up to last more than 50 years.
• Preventing abuses of grantor retained annuity trusts (GRATs) by barring donors from taking assets back from these trusts just a couple of years after establishing them to avoid gift taxes (while earnings on the assets are left to heirs tax-free).
• Limiting the annual exclusion from gift tax for gifts made to trusts.
• Closing "other loopholes in the estate and gift tax, including valuation discounts."
• Protecting farmland (by allowing farmers to lower the value of their farmland by up to $3 million for estate tax purposes) and conservation easements (by increasing the maximum exclusion for them to $2 million).
Miscellaneous tax reforms. Sanders would also:
• Enact a "Wall Street" or "financial transaction" tax on trades of stock (0.5 percent), bonds (0.1 percent) and derivatives (0.005 percent).
• Eliminate the Social Security wage base (for 2016, $118,500) so that everyone pays the same percentage of their income.
• End the "carried interest loophole."
• Enact a new payroll tax to fund paid family and medical leave.
• Create a 6.2 percent income-based health care payroll tax paid by employers, and a 2.2 percent income-based tax paid by households (both referred to as "premiums"), to help fund Medicare for all.
Individual tax reform. The individual tax rates under Trump's tax plan would be:
• 0 percent for single filers earning up to $25,000, married filers earning up to $50,000, and heads of household earning up to $37,500;
• 10 percent for single filers earning $25,001 to $50,000, married filers earning $50,001 to $100,000, and heads of household earning $37,501 to $75,000;
• 20 percent for single earners earning $50,001 to $150,000, married filers earning $100,001 to $300,000, and heads of household earning $75,001 to $225,000; and
• 25 percent for single filers earning $150,000 and up, married filers earning $300,001 and up, and heads of household earning $225,001 and up.
The long-term capital gains and dividends rates would be:
• 0 percent for taxpayers in the 0 and 10 percent income tax rate brackets;
• 15 percent for taxpayers in the 15 percent income tax rate bracket; and
• 20 percent for taxpayers in the 25 percent income tax rate bracket.
According to Trump's website, with these reductions in rates, "many of the current exemptions and deductions will become unnecessary or redundant." His plan also calls for "steepening the curve" of the "PEP" and "Pease" limitations. Taxpayers in the 10 percent brackets would keep "all or most" of their current deductions, those in the 20 percent bracket would keep "more than half" of their current deductions, and those in the 25 percent bracket would keep "fewer" deductions. Two of the most popular deductions, charitable giving and mortgage interest deductions, would remain unchanged for everyone. Trump would also allow individuals to fully deduct health insurance premium payments.
Business tax reform. Trump's tax plan would cut the corporate tax rate to 15 percent and also create a new "business income tax rate" within the "personal tax code" (i.e., because pass-through entities are subject to taxation under individual rates) that would match the 15 percent corporate tax rate for pass-through businesses and freelancers.
Other business tax reforms include:
• Reducing or eliminating deductions and loopholes serving special interests.
• Providing a one-time deemed repatriation of corporate cash held overseas at a 10 percent rate.
• Ending deferral of taxes on corporate income earned abroad.
• Reducing or eliminating corporate loopholes that "cater to special interests," as well as "deductions made unnecessary or redundant" by the new lower rates, and phasing in a "reasonable cap" on the deductibility of business interest expenses.
Estate tax reform. Trump's tax plan would eliminate the estate tax.
Miscellaneous tax reforms. Other reforms proposed by Trump include:
• Ending the current tax treatment of carried interest.
• Repealing the Affordable Care Act.
Catherine E. Murray is a tax analyst with Thomson Reuters Checkpoint within the Tax & Accounting business of Thomson Reuters. Catherine is a federal tax generalist who focuses primarily on writing current awareness tax news articles for Federal Taxes Weekly Alert and also serves as the Project Editor for the Federal Tax Handbook. Catherine completed her B.M. in jazz studies at DePaul University, her J.D. at the Benjamin N. Cardozo School of Law, and her LL.M. in Taxation at New York Law School.
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