Hillary Clinton wants to tax rich and well-to-do Americans harder. Donald Trump wants to lighten the tax load on corporations, the wealthy and everyone in general.
For all the defining issues in this election contest — and there aren’t that many — the pursuit of some tax reform in the first term of the next president is one offering the most potential for action.
As Clinton or Trump arrive with starkly contrasting plans, the ability of either candidate to reshape the federal tax code also will depend on the composition of the Congress the next president confronts. Trump, aligned with a Republican-run Congress, could find ready support. Clinton, elected with a Democrat-led Senate, could find sure allies — while a divided Congress remains a high hurdle for either.
“It’s not wishful thinking” to suggest that tax reform is achievable under the next president, says Rohit Kumar, co-leader of PricewaterhouseCooper’s tax policy services practice and former deputy chief of staff for Senate Majority Leader Mitch McConnell. “There is political consensus among Republicans and Democrats that the tax code is broken and needs to be fixed, and there is starting to be a consensus that, OK… the solution should involve lowering the headline rates’’ and revising business taxes.
“Unlike a lot of the other big issues that are facing this country — immigration comes to mind, where there is no obvious consensus — on tax policy there is at least a consensus on the problem,” Kumar says. “We start from a better position than with a lot of the other issues.”
That said, Clinton and Trump see it from “two pretty divergent approaches,” he notes. “Both candidates are broadly reflective of party ideology on the tax questions… Secretary Clinton, in keeping with Democratic tax orthodoxy, is largely proposing increases on some combination of upper-income individuals and corporations… and Donald Trump is proposing to reduce the tax burden on all taxpayers across the board.”
Clinton proposes to protect anyone making less than $250,000 a year from tax increases while targeting the wealthiest Americans for more, and an “exit tax” for companies taking jobs out of the country. Trump proposes cutting personal income taxes and lowering corporate taxes from their 35 percent top rate to 15 percent and eliminating the estate tax, at considerable potential savings to his own family.
For individuals, Trump proposes cutting the top federal income tax bracket from 39.6 to 33 percent and shrinking the number and rates of the rest of the brackets — a plan that aligns with Republican House Speaker Paul Ryan’s ideas.
Clinton proposes a 4 percent surcharge for people earning more than $5 million a year — establishing a new top tax bracket of 43.6 percent. And she envisions a minimum tax rate of 30 percent for anyone earning more than $1 million a year. This is known as the “Buffett Rule,’’ in honor of billionaire Warren Buffett, who calls it unfair that he pays a lower tax rate than his own secretary.
Trump proposes eliminating the estate tax — which critics call a “death tax” — applied to estates worth more than $5.45 million for individuals and $10.9 million for married couples. Clinton proposes raising it from 40 to 65 percent for the highest-valued estates — worth more than $500 million — and levying it on more estates, starting at $3.5 million for individuals, $7 million for couples.
Repealing the estate tax could greatly benefit Trump’s own family. With Forbes magazine estimating Trump’s personal worth at $3.5 billion — as opposed to his claim of $10 billion — repealing the tax offers a break of more than $1 billion for Trump’s children and as much as $4 billion, depending on whose number is right.
At his trademark Twitter soapbox, Trump claims that Clinton has lost every Republican she ever had supporting her with a proposal penalizing farmers and small business owners “by saying she’ll tax estates at 65 percent.”
“Notwithstanding the fact that the estate tax affects relatively few families, the politics of this are fascinating. It traditionally has polled quite poorly. People don’t like it,” Kumar says. As a veteran of the Senate, he adds, “it’s much easier to get 60 votes to repeal the estate tax than to get 60 votes for what Clinton proposes.”
They also have sharply divergent plans for confronting so-called corporate “inversions” in which companies acquire a foreign firm, relocate overseas and avert U.S. taxation. It’s estimated that $2 trillion in profits is parked abroad.
Trump maintains that taxing repatriated money at 10 percent — instead of the current top corporate tax rate of 35 percent — would give companies incentive to bring that money home. Clinton’s alternative is an “exit tax’’ for companies leaving the country and keeping earnings overseas.
All of this must be considered against a backdrop of repeated but stalled attempts to overhaul the tax code during President Barack Obama’s terms.
And it should be weighed in the context of two generations of restraint in taxation starting with Ronald Reagan’s and George W. Bush’s deep tax cuts — combined with unchecked spending, including 15 years of off-budget expenditures on the wars in Afghanistan and Iraq — that have contributed to rising federal debt.
While Trump contends his plans could spur economic growth to as much as 4 percent a year, critics say they will merely worsen the federal debt.
“It’s very discordant to hear him complaining about the debt on one hand, and proffering a plan that would make it so much worse,” Jared Bernstein, a former chief economist for Vice President Joe Biden and fellow now at the Center on Budget and Policy Priorities, said on CNBC’s “Squawk Box.”
Tax relief alone cannot be blamed for rising debt, Kumar says.
“Deficits have increased under both political parties, even when they were not pursuing tax relief,” he says. “It depends on to what extent the tax cut causes the economy to grow faster… The second is to what extent do you accompany that with spending cuts… It’s a little bit of a false choice to say, ‘Does this increase the deficit?’ They don’t occur in isolation. Lots of other things are going on.”
Clinton’s plans for taxation and spending could increase the national debt by about $200 billion over the coming decade — about 1 percent — according to the nonpartisan Center for a Responsible Federal Budget. Trump’s could increase the current $19 trillion debt by $5.3 trillion in 10 years, the center reports.
Reagan’s 1981 Economic Recovery Tax Act delivered an across-the-board 25 percent reduction in tax rates. And in 1986, his Tax Reform Act cut tax brackets to to two rates — 15 percent for the middle class, 28 percent for the wealthy. This cut the highest rate at the time from 70 to 28 percent, one of the biggest cuts ever.
The federal debt, which stood at $908 billion in 1980, rose to $2.6 trillion in 1988, according to the U.S. Treasury.
In 1993, President Bill Clinton won an increase in the top rates to 36 and 39.6 percent — the highest affecting incomes of more than $250,000 a year.
The federal debt, $4 trillion in 1992, rose to $5.7 trillion in 2000 — though Clinton left office with an annual federal budget in balance, the last one.
Bush won tax cuts in 2001 and 2003 that reduced the top tax rate from 39.6 to 35 percent and lowered the rest of the tax brackets by 3 percent each.
These and other tax cuts added about $1.7 trillion to annual budget deficits between 2001 and 2008, according to the Center on Budget and Policy Priorities. The overall federal debt stood at $5.7 trillion in 2000 — representing 33.6 percent of the Gross Domestic Product — the Office of Management and Budget reports. By 2008, the debt rose to $9.9 trillion — 39.3 percent of GDP.
The close of Bush’s presidency also coincided with a financial market meltdown and the start of the worst recession since the Great Depression.
During Obama’s watch, Congress has wrestled with tax reform and failed, but voted to extend the income tax cuts for most families earning less than $450,000, while returning taxes on capital gains and dividends to their levels before Bush. In Obama’s final year, the federal debt is estimated at $19.4 trillion — 76.5 percent of GDP. Under current laws, it’s projected at $22.5 trillion in 2020 — 75.8 percent.
“The national debt has more or less doubled over the last eight years, and it wasn’t like President Obama was keen on providing billions of dollars of tax relief,” Kumar says.
Clinton is attempting to frame Trump’s plans in the tradition of Reagan’s “trickle-down economics.” At their first debate — delivering a line later panned as canned in a Saturday Night Live skit — Clinton called it “Trumped-up, trickle-down.”
In their second debate, a town hall-styled event Sunday, the conflicting visions of American taxation offer plenty of material for Clinton and Trump.
Nothing ultimately will come of it unless the next president makes it a priority, Kumar suggests. “And it could be addressed on a bipartisan basis,” he says. “If it moves sooner than later, it could build some policy consensus to bridge some of the other issues… This is something to build a presidential library around.”
