[IMGCAP(1)]As both major Presidential candidates’ campaigns get into full gear, some of their positions on tax have become clearer, while others are still up in the air.
One of the positions that is still a bit uncertain is the Trump proposal for a 15 percent tax rate for businesses across the board. It was seen by observers as an incentive for pass-through entities (which are taxed at the individual owners’ rates) to convert to C corporations to take advantage of the lower rate.
That would have been so significant a change that Trump came out with a revised plan, according to Julian Fortuna, a partner at Taylor English. “He said that all businesses, large and small, could benefit from the rate reduction so long as they are willing to retain profits in the business.”
“They haven’t yet clarified exactly what they mean, but the ability to convert from a flow-through to a C corporation has been around,” Fortuna added. “You can do that, so obviously if you reduce the corporate rate to 15 percent and someone with a pass-through who doesn’t need to take out dividends can convert to a C corporation to get the 15 percent rate.”
“Overall, the two plans are representative of the tax policies or initiatives of their respective parties,” Fortuna observed. “Clinton’s plan is progressive and is generally consistent with the proposals that the current administration has put forward. She does not propose a corporate rate reduction, whereas the Obama administration has come out in favor of a corporate rate reduction from 35 percent to 28 percent. In other respects her proposals generally follow those of traditional Democratic tax policies of extracting additional revenue from wealthy taxpayers and using the revenue to fund other initiatives like infrastructure improvement.”
“Trump’s proposals follow the traditional Republican approach of reducing tax rates, both for individuals and businesses,” he said. “The expectation is that the reduction in tax rates will stimulate the economy, because businesses and consumers would use those tax savings to spend on goods and services.”
“The individual tax rate is an area where the Trump plan is simpler. It reduces the number of brackets from seven to three, and eliminates the AMT and makes significant rate reductions, so it’s costly,” Fortuna said. “Clinton’s plan is to retain the current brackets but add two types of surtaxes on top of them. Individuals who earn more than $1 million would pay an effective rate of at least 30 percent, while those who make more than $5 million would pay a 4 percent surcharge.”
The Clinton plan introduces additional complexity in the taxation of capital gains, Fortuna indicated.
“The required holding period for capital gains is currently one year,” he said. “Clinton’s plan introduces a sliding scale. Under her 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 a they do now for gains held for 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.”
“The Trump plan would retain the existing capital gains rate structure, with a maximum rate of 20 percent,” he added. “Both Clinton and Trump would tax the receipt of carried interest as ordinary income.”
“On estate taxes, there is a very different approach,” Fortuna said. “Clinton wants to go back to the higher rates in effect in 2009, when the rate was 45 percent and the exclusion was $3.5 million.”
On Thursday, however, a Washington-based policy group, the Committee for a Responsible Federal Budget, reported that Clinton intends to propose a top estate tax rate of 65 percent on the largest estates, along with other changes (see Clinton Tax Plan Grows $550 Billion in Policy Group’s Report).
“Trump would repeal the estate tax, but he would tax estates on unrealized capital gains above $10 million, and would disallow contributions of appreciated assets to a private charity established by the decedent or the decedent’s relatives,” said Fortuna.
“Both candidates have put out a number of proposals to help families with child care and elder care expenses,” he said. “Trump proposes an above-the-line deduction for child care expenses, capped at the average cost of such expenses in the taxpayer’s state of residence, and a similar deduction for elder care, capped at $5,000 a year. He also proposes an expansion of the Earned Income Tax Credit, and tax-favored contributions of up to $2,000 per year to Dependent Care Savings Accounts. Clinton proposes up to a $1,200 tax credit per child for caregiver expenses. She also proposes to provide tax credits for caregiving expenses for elderly family members.”
“Trump proposes to eliminate all business tax incentives except for the R&D credit,” said Fortuna. “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.’”
On the issue of repatriation of foreign profits, Trump proposes a one-time deemed repatriation of corporate cash held overseas at a discounted 10 percent tax rate, according to Fortuna. “Additionally, Trump has proposed to end the deferral of taxes on corporate income earned abroad while retaining the foreign tax credit regime,” he added.
“While Clinton’s campaign materials do not discuss any specific tax proposals relating to the repatriation of foreign profits, she has proposed to limit the ability of foreign companies doing business in the U.S. from engaging in so-called ‘earnings-stripping,’ which is essentially the tax-free repatriation of profits out of the U.S.,” he said.
With the first debate scheduled for next Monday, expect more details to be forthcoming as the candidates tighten up their proposals.
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