Campaign issues: taxes
12/07/15 Filed in: Taxes | Campaign Issues
Given the importance of the coming presidential election, why not try to evaluate the candidates based on their positions on the issues versus their life stories, ethnic and gender identities, or likability?
To this end, SAFE developed a policy questionnaire for presidential candidates and sent it to most of them. (We couldn’t locate mail or electronic addresses for several candidates who aren’t currently holding public office.) Letter to presidential candidates, 6/9/15.
Responses were requested, but none of the candidates complied. Plan B is to track what candidates are saying about the key issues, ultimately developing a basis for evaluating and comparing their positions. Progress has been slow due to the large number of candidates and fuzziness of much of the campaign rhetoric, but we hope to complete our analysis by April or so.
As a first installment, this entry will consider the positions of Hillary Clinton, the presumptive Democratic nominee, and four GOP candidates (Donald Trump, Jeb Bush, Marco Rubio & Ted Cruz) on the US tax system. Here’s the question SAFE asked.
5. Do you agree the tax system should be simple, efficient and fair? And re fairness, do you believe that (a) everyone should pay tax at the same rates based on their income or consumption, (b) graduated tax rates are appropriate, but all earners should pay some income tax so they will have a stake in the overall cost of government, or (c) lower level earners should pay essentially zero (or even negative) income taxes? How well do you think the current tax system measures up against the simple, efficient and fair criteria? And assuming there is room for improvement, how should the system be changed?
Note that we didn’t ask whether the overall revenue target should be raised, lowered, or left as is. The answer to that question should depend on the agreed amount of spending, with a clear understanding that the government won’t spend more than it takes in.
None of the candidates are likely to say the tax system should be anything other than “simple, efficient and fair,” but they disagree sharply as to what changes should be made.
A. Hillary Clinton has proposed big tax changes. The thrust is to help lower income workers and small businesses while collecting more taxes from the affluent. Economic plan, hillaryclinton.com, 2015.
•Provide tax relief for families - Hillary will cut taxes for hard-working families to increase their take-home pay as they face rising costs from child care, health care, and sending their kids to college. She is calling for extending a tax cut of up to $2,500 per student to help deal with college costs as part of her New College Compact, and for cutting taxes for businesses that share profits with their employees.
For middle class taxpayers, existing tax credits would be renewed or expanded and new tax credits created. About a dozen such changes have been proposed to date, and there may be more. One of the most costly proposals would be a refundable tax credit (paid whether there is tax liability to offset or not) for up to $5,000 of out of pocket healthcare expenses. Hillary Clinton’s tax credit sweepstakes, Wall Street Journal, 11/30/15.
•Reform our tax code so the wealthiest pay their fair share - Hillary supports ending the “carried interest” loophole, enacting the “Buffett Rule” that ensures no millionaire pays a lower effective tax rate than their secretary, and closing tax loopholes and expenditures that benefit the wealthiest taxpayers to pay for her plan to make college affordable and refinance student debt.
Experience has shown it’s not easy to raise a lot of revenue by taxing “the wealthy.” First, wealthy taxpayers will refrain from selling appreciated assets, relocate or shift assets to other jurisdictions, or stop working so hard. Second, higher tax rates on profits and investment income will slow economic growth. What’s the higher priority for Leftists, raising revenue or punishing success? Daniel Mitchell, townhall.com, 2/28/15.
. . . more rational leftists admit that the Laffer Curve is real. They may argue that the revenue-maximizing rate is up around 70 percent, which is grossly inconsistent with the evidence from the 1980s, but at least they understand that successful taxpayers can and do respond when tax rates increase.
We haven’t seen any scoring of the Clinton tax plan proposals, but it seems likely that tax increases on the affluent would fall short of covering the cost of the middle class tax credits. Also, the tax system would become even more complicated than it currently is.
B. Donald Trump doesn’t play favorites. It appears that his tax plan would lower the tax burden for just about everyone. Tax reform that will make America great again, Donaldtrump.com, 2015.
•Married couples with annual income of up to $50K (over 50% of all American adults) would be exempted from income tax; above that the rate would rise in increments to a top rate of 25% (20% on dividends and capital gains) for annual income above $300K. Although many tax preferences would be phased out in the higher tax brackets, most tax filers would be better off – except perhaps for those who are currently receiving net tax refunds as a result of “refundable” tax credits like the EITC (the plan doesn’t discuss what would happen in such cases). The estate (death) tax would be abolished.
•The tax rate on corporations and other business entities would be cut to 15%. There would be a one-time 10% tax on corporate earnings currently being held by foreign subsidiaries of US corporations; future foreign earnings would be taxed on a current basis – with foreign tax credit, which would presumably offset US tax at 15% – whether repatriated or not.
Trump’s tax cuts would be “fully paid for,” it is said, but this seems dubious. On a dynamic scoring basis, according to the Tax Foundation, there would be $10.1 trillion of revenue loss in the first 10 years. Comparison of presidential tax plans and their economic effects, 10/19/15.
C. Jeb Bush would stick closer to the current tax system than other GOP candidates, yet substantially cut tax rates and cap or eliminate some tax preferences. Such reforms would accelerate economic growth (currently about 2% per year), it is said, because the current tax code “is rigged with multiple carve-outs for favored industries” and “penalizes people for moving up the economic ladder.” Americans are urged to consider Bush’s record of cutting taxes and boosting the economy while he was the governor of Florida. Reform & growth, jeb2016.com.
•The number of rate brackets for individual taxpayers would be reduced from seven to three. The highest bracket would be 28%, the same as it was in 1986 under Reagan. The standard deduction would be nearly doubled, the marriage penalty eliminated, and the EITC expanded.
•The employee’s share of Social Security payroll taxes would be eliminated for workers over 67. Tax preferences would be pruned and capped for high bracket taxpayers. The death tax would be eliminated.
•The corporate tax rate would be cut from the current 35% to 20%. A one-time tax of 8.75% (payable over 10 years) would be levied on foreign subsidiary earnings currently being held abroad to defer net (after foreign tax credit) US tax liability. Going forward, the US would end worldwide taxation of the income of US businesses and adopt a territorial system of taxation such as is used by most countries.
•Immediate deduction of new capital investments would be allowed, but “most corporate tax deductions” would be eliminated including borrowing costs. (We’re not sure what purpose would be served by not allowing deductions for operating as opposed to capital expenses, e.g., employee payroll and benefits. Also, why shouldn’t borrowers get a deduction for borrowing costs if lenders are paying tax on their interest income?)
Using dynamic scoring, according to the Tax Foundation (10/19/15), deficits would be increased by $1.6 trillion over the next 10 years. That’s not nearly near so bad as the Trump tax plan, but still hard to justify given the current fiscal problem.
D. Marco Rubio has offered a tax plan that would reduce payments and simplify tax filing for working families and businesses alike. His overarching theme is that America has changed a lot, and we shouldn’t keep plodding along with outmoded policies. A pro-growth, pro-family tax plan for the new American century, marcorubio.com, 2015.
•For individual taxpayers, there would be three rate brackets (15%, 25% & 35%). Most itemized tax deductions would be eliminated, with the exception of charitable contributions and mortgage interest (subject to certain reforms). The standard deduction would be replaced with a refundable tax credit ($2K individual, $4K if married and filing jointly) that phases out at higher income levels. The marriage penalty and Alternative Minimum Tax would be eliminated. The current “maze of education tax incentives” would be replaced with a single, $2,500 universal tax credit for the first four years of post-secondary education and costs re eligible job skill training. All taxes imposed by the Affordable Care Act would be repealed.
•In addition to the current Child Tax Credit, there would be a new CTC of up to $2,500 per child intended to provide “a meaningful incentive for work.” The new CTC could be used to offset payroll taxes as well as income tax liability; it would be phased out for higher income taxpayers.
•For employers, there would be a 25% non-refundable tax credit (limited to
$4,000 per worker) for any business offering between 4 and 12 weeks of paid family leave when workers have qualifying family or medical events.
•Top business tax rate would be reduced from the current 35% (or 39.6% in certain cases) to 25%. Immediate expensing would be allowed for all capital expenditures and inventory.
•International business income would be taxed on a territorial basis. Currently deferred overseas earnings would be subject to tax at a 6% rate, payable over 10 years.
•Tax on capital gains, dividends and estates would be reduced to 0% so as to eliminate double taxation, i.e., all business income would be subject to tax once at the entity level. Interest income would not be taxable for lenders, and interest expense would not be deductible for borrowers.
On a dynamic scoring basis, the Tax Foundation (10/19/15) estimates that the Rubio tax plan would increase deficits by $2.4 trillion over ten years. That’s far lower than the revenue loss from the Trump plan, but a bit worse than the Bush plan.
E. Ted Cruz has proposed a tax plan that would resemble the FairTax proposal (a nonstarter as the 16th Amendment will never be repealed), but not completely eliminate the income tax. The IRS “as we know it” would be abolished. The simple flat tax, tedcruz.org, 2015.
•Individual income above a floor amount (e.g., $36K for a family of four) would be subject to income tax at a flat 15% rate. Tax returns could supposedly be filed on a postcard-size form, although there would obviously need to be some supporting schedules to identify dependents and support claims for “saving plan contributions,” child tax credit, and earned income tax credit.
•The corporate income tax would be replaced by a 16% tax on all business income (the “Business Flat Tax” or BFT), i.e., “revenues minus expenses such as equipment, computers, and other business investments.” Capital expenditures would be immediately deductible. A 10% tax would be imposed on repatriated foreign earnings (applicable to future as well as past earnings, and what about foreign tax credit?). There would be “border adjustability,” with foreign imports subject to BFT and US exports exempted, so as to give US businesses “a level playing field.”
What this description manages to avoid saying is that the BFT would be a value added tax, which many countries impose in addition to income taxes. The tax would be levied on gross revenue less exports, purchases from other domestic firms, and capital outlays. This tax would yield more revenue than the scaled-down individual income tax, making it the government’s largest revenue source. Value-added tax catches on in Republican presidential race, Richard Rubin, Wall Street Journal, 11/12/15.
•Payroll taxes on employers and employees would be abolished, and also the death tax and Alternative Minimum Tax.
On a dynamic scoring basis, the Tax Foundation (10/19/15) estimates the Cruz tax plan would increase deficits by $0.8 trillion over ten years. That’s the smallest projected revenue loss from any of the tax plans in this survey.
ASSESSMENT – The Clinton tax proposals seem unlikely to bolster the economy and the Trump tax plan would be fiscally irresponsible. Let’s rate both of them as "unacceptable."
The Bush plan offers some welcome tax rate cuts, but we’re not clear what is proposed re business tax deductions nor why the changes would be desirable. The projected revenue loss would increase the already massive spending cuts needed to balance the budget.
The Rubio plan seems well thought out on the business side, and we applaud the proposal to exempt dividends and capital gains from income tax. The tax system shouldn’t be used as a vehicle for doling out welfare, however, which is the basic reason for hiking child tax credits, etc. Also, the projected revenue loss is higher than for the Bush plan.
Critics have suggested that GOP candidates would do better to offer higher tax rate reductions versus tax credits designed to benefit certain segments of society. Where the Rubio tax plan falls short, Amity Shlaes & Matthew Denhart, Wall Street Journal, 4/2/15.
A Republican plan that emphasizes “fairness” to this extent risks establishing a trend. Rubio-Lee sets the stage for greater tax gifts to particular groups in the future, with eventual hikes to the top marginal rate. If the self-styled party of enterprise does not emphasize the individual, no one will.
SAFE disapproves of refundable tax credits that could result in negative income taxes or reduce payroll taxes. Accordingly, our tax plan would eliminate the current EITC, CTC, etc. instead of creating new tax welfare benefits. SimpleTax, 2010.
The Cruz plan would streamline the tax system and slash rates, with relatively modest revenue loss. All segments of the population would pay taxes whether they realized it or not, as businesses would reflect the BFT in their selling prices. But beware, because implementation of this plan would make it easier to sneak through future tax increases. Value-added tax catches on, op. cit, 11/12/15.
. . . conservative critics are beginning to raise alarms. Adopting a broad tax on goods and services, they say, would make the sting of taxation less palpable and—eventually—let the U.S. adopt the revenue system that fuels the European social-welfare states.
The Bush, Rubio and Cruz tax plans would all represent an improvement over the status quo, but each has its drawbacks and we don't see any of them as clearly better than the others. Accordingly, let's give each of these plans a provisional rating of "good."