As we move from the nominating process into election season, the two major candidates left standing — Hillary Clinton and Donald Trump — have filled in the details on their originally loosely defined tax plans.
The positions taken by a candidate on the campaign trail might be far removed from any legislation they actually attempt to enact after the election, but the proposals put forth by the candidates give evidence of their thinking on various topics and point to the direction that their administration might take on a particular aspect of taxation.
The Clinton and Trump plans are vastly different in most areas, but they do agree on getting rid of the carried interest rule.
“There are some things to look at whenever you examine the various proposals,” said Tom Wheelwright, CPA, founder and chief executive of accounting firm ProVision. “Clearly, it looks like the carried interest rule is going to die, at least with respect to Wall Street.”
“It originally was meant for real estate,” explained Wheelwright. “If you did something for a company and instead of getting paid you got an interest in the company but only if certain things happened, the tax law takes the position that you received nothing so there is no taxable income. You’re getting paid not in future profit but in gain on the sale of the company, in the future, which is why it’s called ‘carried.’ ... In a typical real estate deal the developer would go in and pay profits to the investors. Once the investors got their money back, the developer would start taking a bigger share of carried interest. When the property is sold, there’s capital gain to the developers.”
POINTS OF DEPARTURE
Beyond carried interest, the candidates agree on very little, although both tout their tax plans as a boon to the middle class.
Clinton would retain the current tax brackets of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent. She would also implement a ”fair share surcharge” on multi-millionaires and billionaires and fight for measures like the Buffett Rule, which would ensure that those making more than $1 million per year pay at least an effective tax rate of 30 percent. The 4 percent surcharge would apply to “the two out of every 10,000 taxpayers making more than $5 million per year who are the most likely to benefit from tax planning. This surcharge is a direct way to ensure that effective rates rise for taxpayers who are avoiding paying their fair share, and that the richest Americans pay an effective rate higher than middle-class families.”
She also would retain the Obamacare 3.8 percent tax on net investment income, with the worst-case scenario (for a taxpayer) leading to a high of 47.4 percent.
Trump says that his plan “removes nearly 75 million households — over 50 percent — from the income tax rolls.” This would be accomplished by raising the standard deduction to about four times the current levels for single and joint filers. Other Americans will get a simpler Tax Code. In his recently retooled plan, Trump said that he would work with House Republicans using the same brackets they have proposed: 12, 25 and 33 percent. “This new Tax Code eliminates the marriage penalty and the Alternative Minimum Tax while providing the lowest tax rate since before World War II,” according to Trump.
Because he would repeal Obamacare, there would be no tax on net investment income. The “average cost of childcare spending” would be fully deductible.
Businesses, large or small, would pay tax at the same rate of 15 percent under Trump’s plans. The lower rate would end corporate inversions, and cause trillions of dollars to come back into the country, according to the Republican candidate. His plan would impose a one-time favorable rate of 10 percent on repatriated funds.
In addition to implementing a fair share surcharge, Clinton intends to shut down the “private tax system” for the wealthiest, starting by closing specific egregious loopholes “and remaining vigilant for new loopholes lawyers and accountants try to find next.” These include the “Bermuda reinsurance loophole, and tax gaming through complex derivative trading;” the “Romney Loophole” “by limiting the ability of the very wealthiest to game the system by sheltering large income in tax-preferred accounts;” and closing the carried interest loophole.
Beyond these specific loopholes, Clinton has called for raising capital gains rates for short-term trading, in order to encourage long-term investment.
Currently long-term capital gains (on investments held for more than one year) are taxed at a top rate of 20 percent, just over half of the top rate on income of 39.6 percent. The top rate on short-term capital gains (on investments held for one year or less) is the same as the individual top rate of 39.6 percent. In addition, the Net Investment Income Tax takes another 3.8 percent of the investment income above certain threshold amounts.
Trump would cap taxes on dividends and capital gains at 20 percent.
Under Clinton’s plan, the top rate on capital gains would stay at 39.6 percent for a second year, and would then be lowered on a sliding scale over the next four years. In order to be taxed at the current favorable capital gains rate, an investor would have to hold the investment for six years. The plan is designed to counter what Clinton calls “quarterly capitalism.”
Clinton has called for eliminating the deductibility of reinsurance premiums paid to foreign subsidiaries, and would tax carried interest at ordinary income tax rates instead of capital gains and dividends rates, and would give businesses tax credits for profit-sharing. She would provide targeted tax relief for small businesses, and would simplify the tax process.
Trump’s plan reduces the corporate tax rate from 35 percent to 15 percent, but would eliminate most business deductions and end the ability of corporations to defer taxes on income earned abroad. He would cap the deductibility of business interest expenses at a “reasonable” amount, and would allow a one-time repatriation of overseas earnings at a 10 percent tax rate.
Trump opposes the estate tax: “The Death Tax punishes families for achieving the American dream. Therefore, the Trump plan eliminates the Death Tax.”
Clinton, meanwhile, calls for “returning the estate tax to 2009 parameters, and lowering the exemption for the estate tax from almost $11 million today,” while raising the estate tax rate.
For how the plans might play out, see our experts' take, "But Do They Mean It?"
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