On Super Tuesday — and as the income tax filing deadline approaches — it’s important to take a look at the presidential candidates’ tax policies, which vary widely on their economic impacts and actual costs, with measures ranging from eliminating the estate and alternative minimum taxes to implementing the Buffet Rule.
A dozen states — Alabama, Arkansas, Georgia, Massachusetts, Minnesota, Oklahoma, Tennessee, Texas, Vermont and Virginia – vote Tuesday for both Republicans and Democrats.
Work began in earnest among lawmakers last July on measures to advance comprehensive tax reform in five areas: individual income tax; business income tax; savings & investment; international tax; and community development & infrastructure.
A recent report by the Tax Council and EY’s quantitative economics and statistics practice finds that 61% of U.S. business tax professionals expect tax reform to happen in 2018 or earlier.
Read on to see how the Tax Foundation, an think tank that supports reforming the tax code, laid out the presidential candidates’ tax plans, as well as how their plans will impact the economy. To make these projections, it used its proprietary model, which it describes as “a ‘neoclassical’ model that measures the effects of tax policy changes on the cost of capital and the supply of labor.”
Here’s how six of the presidential candidates’ tax policies break down:
Hillary Clinton (D):
Clinton’s tax plans include increasing the marginal tax rates for taxpayers with incomes of more than $5 million, a new 30% minimum tax (the Buffett Rule), and the restoration of the estate tax to its 2009 parameters.
- Raise tax revenue by $498 billion over the next decade on a static basis. However, the Tax Foundation says, the plan would end up collecting $191 billion over the next decade when accounting for decreased economic output in the long run.
- A majority of the revenue raised by Clinton’s plan would come from a cap on itemized deductions (the Buffett Rule) and a 4% surtax on taxpayers with incomes over $5 million.
- Clinton’s proposals to alter the long-term capital gains rate schedule would actually reduce revenue on both a static and dynamic basis due to increased incentives to delay capital gains realizations.
- The plan would reduce GDP by 1% over the long term due to slightly higher marginal tax rates on capital and labor.
- On a static basis, the tax plan would lead to 0.7% lower after-tax income for the top 10% of taxpayers and 1.7% lower income for the top 1%. When accounting for reduced GDP, after-tax incomes of all taxpayers would fall by at least 0.9%.
Sen. Bernie Sanders, I-Vermont
Among his proposals includes increasing the top marginal income tax rate to 54.2%, taxing capital gains and dividends as ordinary income, and moving the U.S. toward a worldwide tax system by ending the deferral of foreign-source business income.
- The Democratic candidate’s plan would raise tax revenue by $13.6 trillion over the next decade on a static basis. However, the plan would end up collecting $9.8 trillion over the next decade when accounting for decreased economic output in the long run.
- A majority of the revenue raised by the Sanders plan would come from a new 6.2% employer-side payroll tax, a new 2.2% broad-based income tax, and the elimination of tax expenditures relating to health care.
- The plan would significantly increase marginal tax rates and the cost of capital, which would lead to 9.5% lower GDP over the long term.
- On a static basis, the plan would lead to 10.56% lower after-tax income for all taxpayers and 17.91% lower after-tax income for the top 1%. When accounting for reduced GDP, after-tax incomes of all taxpayers would fall by at least 12.84%.
Donald Trump (R)
- Consolidates the current seven tax brackets into four, with a top marginal income tax rate of 25%.
- Taxes long-term capital gains and qualified dividends at a top marginal rate of 20%.
- Creates a substantial zero bracket for lower income individuals.
- Steepens the curve of the Personal Exemption Phase-out (PEP) and the Pease Limitation on itemized deductions.
- Eliminates the Alternative Minimum Tax.
- Eliminates the Net Investment Income Tax of 3.8%, which was passed as part of the Affordable Care Act.
- Taxes carried interest at ordinary income tax rates instead of capital gains and dividends tax rates.
- Phases out the tax exemption on life insurance interest.
- Cuts the corporate income tax rate from the current 35% to 15%.
The increased incentives to work and invest from this tax plan would increase the size of the economy by 11% over the long run. The plan would lead to 6.5% higher wages and a 29% larger capital stock.
The larger economy is mainly the result of the significant reduction in the service price of capital due to the rate reductions for corporations and pass through businesses. In addition, the reduction of marginal tax rates on individual income would increase incentives to work and result in 5.3 million full-time equivalent jobs.
Overall, the plan would reduce federal revenue on a static basis by $11.98 trillion over the next 10 years. Most of the revenue loss is due to the reduction in individual income tax rates, which would reduce revenues by approximately $10.2 trillion over the next decade.
Sen. Marco Rubio, R-Florida
Sens. Marco Rubio and Mike Lee have developed a plan to reform the individual and corporate income tax codes by reducing the number of tax brackets to two (15% and 35%) and eliminating nearly all itemized deductions.
- Rubio’s plan would also create a new child tax credit of $2,500; replace the standard deduction and personal exemption with a refundable personal credit; and create a top tax rate of 25% on both corporate and noncorporate business income;
- Businesses would be allow to deduct the cost of investments when they occur (full expensing), and Rubio’s plan would move to a territorial tax system that would exempt active foreign income of U.S. corporations.
- His plan would also eliminate the estate tax, as well as most business tax credits and many special deductions, and integrate corporate and shareholder taxes to eliminate double taxation.
The Rubio-Lee tax reform plan would increase the size of the economy by 15% over the long run, boost investment by nearly 49%, wages by 12.5%, and raise the level of employment by nearly 2.7 million jobs.
The plan would increase federal revenue on a dynamic basis by an annual $94 billion in the long run, following an estimated $1.7 trillion revenue loss over the initial 10-year period. On a static basis, the plan would cost $414 billion annually.
Sen. Ted Cruz, R-Texas
- Cruz’s tax plan would enact a 10% flat tax on individual income and replace the corporate income tax and all payroll taxes with a 16% “Business Transfer Tax,” or subtraction method value-added tax. In addition, his plan would repeal a number of complex features of the current tax code.
Cruz’s plan would significantly reduce marginal tax rates and the cost of capital, which would lead to a 13.9% higher GDP over the long term, provided that the tax cut could be appropriately financed.
- The plan would also lead to a 43.9% larger capital stock, 12.2% higher wages, and 4.8 million more full-time equivalent jobs.
- On a static basis, the plan would cut taxes by 9.2%, on average, for all taxpayers.
- Accounting for economic growth, all taxpayers would see an increase in after-tax income of at least 14% at the end of the decade.
- His plan would cut taxes by $3.6 trillion over the next decade on a static basis. However, the plan would end up reducing tax revenues by $768 billion over the next decade when accounting for economic growth from increases in the supply of labor and capital and the much broader tax base due to the new value-added tax.
Dr. Ben Carson (R)
Dr. Ben Carson’s tax plan would replace the federal income tax code with a modified Hall-Rabushka-style flat tax of 14.9%.
- The plan would lead to a 16% higher GDP over the long term, provided that the tax cut could be appropriately financed.
- His plan would cut taxes by $5.6 trillion over the next decade on a static basis. However, the plan would end up reducing revenues by $2.5 trillion over the next decade when accounting for economic growth, due to increases in the supply of labor and capital.
- The plan would also result in increased outlays, due to higher interest on the debt, creating a 10-year deficit somewhat larger than the estimates above.
- The plan would move to a consumption base, which would significantly reduce the cost of capital.
- The plan would also lead to a 46.6% larger capital stock, 10.9% higher wages, and 5.2 million more full-time equivalent jobs.
- On a static basis, the plan would increase taxes on all income groups except the top 10% of taxpayers. The plan reduces the after-tax income of the bottom three income deciles by as much as 14.8%. The top decile would see an increase in after-tax income of 16% and the top 1% would see an increase of 33%.
- Accounting for economic growth, all taxpayers would see an increase in after-tax income of at least 0.5% in the long term.
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