But Do They Mean It?
Analysts weighing in on the tax proposals of the two major candidates not surprisingly prefer one plan or the other depending on where they fall on the political spectrum. Those who are looking for equality and fairness tend largely to prefer the plans put forth by Hillary Clinton, while those who desire more simplicity and lower rates to spur growth favor the proposals of Donald Trump. (For more specific details on their platforms, see "Tax on the campaign trail.")
“Trump’s plan is vague on the pay-fors but the Clinton plan is short on details in some respects as well,” said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting. “Trump goes beyond the House Republican plan in its concept of not just lowering the corporate tax rate, but lowering the business income tax rate to 15 percent. The fact that the ordinary income rate goes up to 33 percent under the plan creates a real incentive for a sole proprietor or pass-through to shift what would otherwise be ordinary income into business income. The Trump people have said they would come up with something to prevent people trying to game the system. They’re aware of the problem, but they haven’t identified a solution.”
“Under the current system an employee serves as a check on the employer that wants to treat a worker as an independent contractor,” he said. “The employer would push to have a worker treated as an independent contractor because it would allow the employer to avoid paying half of the payroll taxes. But under the Trump plan the worker would also benefit from being treated as an independent contractor. They would have to pick up the payroll taxes but what was ordinary income to the employee would become business income to the independent contractor.”
“Both Trump and Clinton have said they wouldn’t touch the charitable or mortgage interest deductions,” Luscombe observed. “On the corporate side, they talk about closing loopholes but have offered nothing specific about what to eliminate to reduce tax rates. Clinton wants to make corporations more competitive but hasn’t proposed anything specific on the corporate side at all.”
A PRACTICAL LOOK
“Always look at these practically, in terms of what’s going on and what’s possible,” said Dean Zerbe, national managing director of alliantgroup and former senior counsel on the Senate Finance Committee. “So you have to filter out your dreams, hopes and aspirations.”
“Trump’s proposal is more straightforward. He wants to cut taxes. ... If he keeps the Senate and House, he would be seeing what [Speaker of the House Paul] Ryan and [current Ways and Means Committee chair Kevin] Brady have been putting in the House as the starting point of a discussion. It’s a gut check as to how much in tax cuts he would get. ... People tend to forget that a not-insignificant part of the Republican base is concerned about the deficit, and Trump’s current proposal would increase the deficit.”
“I think that Trump has made it clear that for him it’s all about negotiations,” Zerbe explained. “He views his position as an opening bid. It would be interesting to see House Republicans negotiate with a Republican president who is more fervent about tax cuts than they are.”
“So I would look for a reduction in the corporate rate but not as much as they propose, a reduction in the individual rate, while striking down the health care increases, and probably not any changes in the estate tax,” Zerbe predicted. “Carried interest would go for sure.”
THE OTHER SIDE
Clinton has ambitious proposals, according to Zerbe. “If she wins, there’s a good chance the Democrats will take over the Senate,” he said. “It’s not in the cards that they take over the House as well, but if they did it would change the calculus.”
“There are a little bit of small-ball proposals that she’s got,” he said. “If she were to do international tax reform, it would be along the lines that [New York Senator Chuck] Schumer proposed. She could get it done, although it wouldn’t endear her to the Sanders folk.”
“The House Republicans don’t have to do anything,” he said. “AMT and the extenders are taken care of. The expiring provisions are all ones that they don’t care about. She can say she wants a massive tax increase, but the House will simply not act on it. It’s already an extremely ugly election process. If Clinton wins, they’ll view it as due to anti-Trump feelings, not as a mandate. No candidate will have a strong mandate — the feeling is that everyone is voting against the other person. “
“The Republicans are happy to not feel any heat opposing the Buffett Rule [a 30 percent minimum tax on individuals making more than a million dollars a year],” he continued. “That’s not going anywhere unless the Democrats take over the House, at which point they can say they have a mandate beyond the presidency. In that case I think they will quickly blink and set exceptions and loopholes. The Buffett Rule is a good rhetorical line but it hasn’t been thought through, especially in its implications for tax-exempt bonds.”
“Clinton could have a minor bill on energy extenders, and some of the other expiring provisions would be revisited. She would get rid of the breaks for fossil fuels, but Brady is from Texas and she might pivot a bit if she overplays her ability to work with Republicans. To be blunt, Trump wants to cut taxes and she wants to raise taxes, but I don’t think she has the zeal for raising taxes that the current administration had when it came in.”
“Congressional Democrats will have some priorities, but tax reform won’t be one of them,” he said. “Getting more money for infrastructure will be a priority, to keep the building unions happy. But there won’t be any eye-watering increases unless she gets the House — in that case, hold onto your wallet.”
Gary DuBoff, a CPA and a principal at Florida-based Top 100 Firm MBAF, noted that both candidates would eliminate special treatment for carried interest. “However, private equity firms managed more than $3.8 trillion dollars at the end of 2014,” he said. “The tax revenues generated by eliminating preferential tax treatment on carried interests would be substantial. Care must be taken that any changes in this area are cautiously crafted so that the tax consequences to middle-class entrepreneurs who invest their time and energy — sweat equity — with little capital invested ... are not hurt unintentionally.”
“In addition, some argue that a change in how private equity firms are compensated may change the industry and have a long-term impact on the overall economy,” he said. “In all likelihood, the lobby for private equity and other industries affected by proposals from both candidates on carried interest will make dramatic changes difficult at best.”
Clinton’s proposal to reduce short-term trading involves a reduction in rates the longer an investment is held, DuBoff observed. “So for example, a taxpayer would pay ordinary tax rates for up to a two-year holding period, a reduction to 36 percent for more than two years, 32 percent for more than three years, 28 percent for more than four years, 24 percent for more than five years, and a 20 percent rate for more than six years. Now, surprisingly the long-term rates — greater than six years — remain at 20 percent. These rates don’t include the 3.8 percent Medicare tax. Clinton also favors preferential tax rates for investors in small business or in communities that are challenged economically.”
WHICH WOULD HURT MORE?
“Clinton’s plan will have the lesser effect on the economy, as Trump’s plan would require massive reductions in tax benefits currently enjoyed by many industries unless he plans to pay for it with increased deficits,” said Tom Wheelwright, founder and chief executive of accounting firm ProVision.
“Clinton’s plan will certainly have an impact on the flow of investment dollars as more people will let their money sit, instead of moving it into different investments. It will likely impact the stock market, at least in the short term,” Wheelwright said.
But every major tax overhaul produces unintended consequences, according to Wheelwright. “The unintended consequences of the Trump plan are unknown. Remember, though, that the unintended consequence of the Reagan tax plan was the failure of the savings and loans and the massive loss of wealth to those who owned real estate. The loss of value in real estate as a result of the 1986 tax act was much greater than the loss of value in 2009 and 2010 as a result of the mortgage failures. Until we get details of where Trump will cut tax benefits, we won’t know which industries will be affected. We just know that there will absolutely be unintended consequences whenever you have major changes to the incentives in the tax law.”
Wheelwright noted that the reason Warren Buffet has called on Trump to release his tax returns is simply because Buffet knows that the way the tax law works, it’s unlikely that Trump pays much, if anything, in taxes. “The tax law is set up to heavily reward real estate investors. So it is likely that Trump pays an even lower tax rate than Buffet or Romney,” he said. “That might not play well with the public, as few understand that the tax law is really a series of incentives for business owners and investors. A sophisticated business owner and investor like Trump is going to hire the best advisors to take advantage of all of the legal incentives the government would legally provide to him.”
Both the Clinton plan and the Trump plan envision spending more money on infrastructure, according to John Arensmeyer, founder and chief executive of Small Business Majority. “We feel this is great for small business,” he said. “The difference is that Clinton has a series of proposals that are paid for, whereas the Trump proposals are not. When we analyze the Trump plan, it would add $9.5 trillion to the deficit over the next decade.”
Clinton’s proposed “fair share surcharge” and the “Buffett Rule” would not negatively impact small business, according to Arensmeyer. “Contrary to what you might hear, these don’t affect small business,” he said. “Less than one-half of 1 percent of small businesses pays tax at the top rate. When we talk about tax on the very wealthy, it just doesn’t have an impact on small business.”
Clinton’s plan to aid students by refinancing will enable many of them to become entrepreneurs, Arensmeyer observed. “Massive amounts of debt are an impediment to young people who want to start businesses,” he said. Likewise, her proposal to cap the cost of child care at 10 percent of family income would be “a huge factor in women’s ability to start a business,” he said. “On the flip side, Trump’s proposal to make child care free would massively increase the deficit,” said Arensmeyer.
“We’re in favor of some cut in the business rate, but a 15 percent rate would be too drastic,” he said. “And eliminating the estate tax does nothing for small business except to add to the deficit. It’s a myth to say that cutting the estate tax will have an impact on small business.”
“For a Tax Code that’s already too complicated, there hasn’t been any talk about real simplification,” said Roger Harris, president of Padgett Business Services. “That’s the sad part about both plans. It sounds simple in a campaign to say you’ll put in a new deduction or credit or a sliding scale or a longer holding period for certain types of investments, but in practice it becomes very complex when it goes into the code or regulations. What sounds easy in a speech can become very complex. For example, if you want to make child care expenses deductible, how many pages of rules and regulations do you think it will take?”