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Trump vs. Clinton: their tax proposals

As the 2016 US presidential race between Republican Donald Trump and Democrat Hillary Clinton heads into the home stretch, we review the candidates’ tax proposals.

As the 2016 US presidential race between Republican Donald Trump and Democrat Hillary Clinton heads into the home stretch, the EY Center for Tax Policy reviewed the candidates’ positions on key policy issues and what they could mean for companies. While the plans of each candidate could change ahead of Election Day, set for 8 November, the following is an overview of the candidates’ tax proposals released to date.

Trump released a detailed tax plan in September 2015 and announced revisions on 8 August and 15 September 2016. Clinton has not released a comprehensive tax plan; she has described her positions on a piecemeal basis, and her campaign has promised that additional detail is forthcoming.

The tax plans of the two candidates share some similarities but are different in many ways that include structure: Trump’s plan includes an overall tax reform framework with many details left unstated; Clinton’s plan is not comprehensive and includes detailed proposals only in discrete areas.

The clearest distinction to be made between the two positions is in terms of revenue: the Trump plan is estimated to include a US$2.6t to US$15.9t tax cut, depending on whether macroeconomic effects are taken into account. Clinton’s positions amount to as much as US$1.1t in tax increases. 

In August 2016, the candidates began battling each other in earnest with respect to policy, delivering speeches in Michigan seeking to highlight aspects of their economic plans and to draw contrasts with one another, particularly on tax issues.

In an 8 August speech, Trump said, “Hillary Clinton — who has spent her career voting for tax increases — plans another massive job-killing US$1.3 trillion-dollar tax increase. Her plan would tax many small businesses by almost 50%.”

In an 11 August speech that was viewed as a rebuttal, Clinton said it is a myth that Trump will act to “stick it” to the rich and powerful. “He would give trillions in tax cuts to big corporations, millionaires and Wall Street money managers,” she said. “That would explode our national debt and eventually lead to massive cuts in priorities like education, health care and environmental protection.

Corporate taxes

 

Trump

Clinton

Top corporate tax rate

15%

No specifics on rates

Call for unspecified business tax reform to generate US$275b in five years to go toward infrastructure spending

“Reform our tax code to reward businesses that invest in workers and production here in America, rather than … overseas”

Top pass-through rate

15% (new business income tax rate within the personal income tax code that matches the corporate rate)

Taxation of future foreign earnings

Immediate worldwide taxation; repeal of deferral

Mandatory tax, untaxed accumulated foreign earnings

10%

Inversions 

Discouraging inversions to grow the economy

Exit tax

50% Sec. 7874 test

Offshoring

35% tariff on goods imported into the US by US companies that have moved overseas

Claw back tax breaks if corporations ship jobs overseas and use proceeds to invest in America

Provide tax incentives to encourage investment in the hardest-hit manufacturing communities

Cost recovery

100% expensing for manufacturers

 (No stated position)

Interest

Manufacturers electing to expense capital investment lose the deductibility of corporate interest expense

Derivatives

(No stated position)

Require that derivative contracts be marked to market annually

Other business provisions

Most eliminated, except for R&D credit

Eliminate tax incentives for fossil fuels

End “Bermuda reinsurance loophole”

Impose tax on high-frequency trading

 

Individual taxes

 

Trump

Clinton

Individual tax rates

12%, 25%, 33%

No rate changes, but:

4% “fair share” surtax on annual income over US$5m

Buffett Rule minimum 30% rate for income over US$1m

28% cap on the benefit of itemized deductions for high incomes

Capital gains and dividends

Existing capital gains rate structure

3.8% net investment income tax (NIIT) repealed

Ordinary income rate for assets held less than two years (+3.8% net investment income tax)

Gains from assets held less than two years taxed at 39.6% (+3.8% NIIT)

Gains from assets held two to three years taxed at 36% rate (+3.8% NIIT)

Rate declines by 4 percentage points each year asset held until reaching 20% (+3.8% NIIT) at year six

Dividends

Unchanged but NIIT repealed

Unchanged

Carried interest

Ordinary income

Ordinary income

Estate tax

Repealed, but capital gains held until death will be subject to tax, with the first US$10 million tax-free

2009 regime of US$3.5m exemption, 45% rate

Lifetime gift tax exemption set at US$1m

Dependent care

Full deductibility of average-cost child care expenses

Cap child care costs at 10% of income

Tax credit for caregivers of elderly, disabled relatives

Other itemized deductions

Capped at US$100,000/US$200,000

Cap all itemized deductions at a tax value of 28%, with exception for charitable contributions

Retirement policy

(No stated position)

Close the “Romney loophole” on individual retirement accounts

Personal exemption phaseout (PEP) and the Pease limitation on itemized deductions

In September 2015, proposed “steepening the curve” of PEP and Pease; current position unclear

(No stated position)

Personal alternative minimum tax

Eliminated

Retained

Life insurance buildup

Included in income for high earners

(No stated position)

Trump’s plan

Trump’s tax plan generally follows the formula of a number of Republican tax reform plans in recent years, of lower rates combined with base broadening. He proposes:

  • A 15% CIT rate
  • A new business income tax rate within the personal income tax code matching the 15% CIT rate
  • Individual income tax rates of 12%, 25% and 33%, the same as the House Republican tax reform Blueprint released 24 June

In his 8 August speech, Trump pledged to work with House Republicans on tax issues and, in addition to adopting their proposed individual rates, brought his plan closer to theirs by announcing support for immediate expensing of new business investments. The House plan proposed expensing in conjunction with eliminating the deductibility of net interest expense.

In conjunction with a 15 September speech to the Economic Club of New York, Trump clarified that expensing will be limited to manufacturers, and those who elect expensing will lose the deductibility of corporate interest expense.

The Trump campaign also stated that most corporate tax expenditures would be eliminated, except for the R&D Credit. In addition to reflecting Trump’s call for repeal of the estate tax, campaign documents indicate that a step-up in basis would be disallowed for estates over US$10 million: “The Trump plan will repeal the death tax, but capital gains held until death will be subject to tax, with the first US$10 million tax-free as under current law to exempt small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.”

Trump has proposed capping itemized deductions at US$100,000 for single filers and US$200,000 for married filers, and has highlighted the benefits of his proposals for working Americans and the middle class. “By lowering rates, streamlining deductions, and simplifying the process, we will add millions and millions of new jobs. In addition, because we have strongly capped deductions for the wealthy, and closed special interest loopholes, the tax relief will be concentrated on the working and middle class taxpayer …,” he said, “This is a working and middle-class tax relief proposal.”

The fact sheet proclaims that Trump’s economic proposals would add 25 million jobs over a decade, which equates to 200,000 new jobs per month.

Trump’s latest tax reform plan revision generated considerable confusion regarding his previously proposed 15% business income tax rate for pass-through entities, which is intended to match a 15% statutory CIT rate. The latest statement from the Trump campaign suggests that small business owners who elect to be taxed under the 15% business tax rate will not face double taxation. Owners of large businesses will incur dividend taxes.

Trump continues to call for a 10% tax on repatriation, saying, “Many larger businesses will want to repatriate trillions of dollars that they now keep abroad to avoid taxes.” Trump has said that it is not hard to understand why companies will not bring profits back if they are subject to the full corporate tax rate. “I think it’s going to be something that will be so phenomenal, far beyond what people even think,” he said. “By taxing it at 10% instead of 35%, all of this money will come roaring back into our country and lots of good things will start to happen.”

His latest campaign materials do not indicate whether Trump continues to support repeal of deferred taxation of foreign earnings.

On 13 September, Trump detailed his child care plan to allow working parents to deduct from their income taxes child care expenses for up to four children and elderly dependents, capped at the average cost of care for the state of residence. The deduction would be available to taxpayers who take the standard deduction as well as itemize deductions, but only those earning US$250,000 per year or less for individuals and US$500,000 for couples.

The eldercare exclusion would be capped at US$5,000 per year. Additional child care spending rebates would be provided to lower-income taxpayers through the Earned Income Tax Credit. Trump also proposes creating Dependent Care Savings Accounts that would allow both tax-deductible contributions and tax-free appreciation year-to-year. He also would guarantee six weeks of paid maternity leave by amending the existing unemployment insurance that companies are required to carry.

Clinton’s plan

The details released thus far by Clinton do not amount to a tax reform plan per se, and do not directly change statutory individual income tax rates or the corporate tax rate. Instead, she seeks to use tax changes affecting corporations and high-income individuals to pay for infrastructure and education investments.

“We are going to tax the wealthy who have made all of the income gains in the last 15 years,” Clinton said during an 17 August campaign event in Cleveland, OH. “The super wealthy, corporations, Wall Street, they’re going to have to invest in education, in skills training, in infrastructure because, we have to grow this economy. We do need to have the resources to do that.”

Clinton wants business tax reform to provide US$275b in infrastructure investment over five years, but has not provided reform details and has not proposed to change the current system of taxing the foreign earnings of US multinational corporations or any other structural changes to the corporate tax system. (President Obama has long called for a 14% one-time tax on previously untaxed foreign income to fund infrastructure investment.)

During an 11 August speech in Michigan, Clinton said she would work with both parties to put Americans to work building and modernizing roads, bridges, railways, ports and airports. “We are way overdue for this,” she said.

Clinton has called for a “more progressive, more patriotic tax code that puts American jobs first,” including by: ending the ability of corporations to write off the cost of outsourcing of jobs and production; clawing back the US tax benefits received by outsourcing companies; and establishing an exit tax for inverting companies. More generally, she called for cracking down on “tax gaming by corporations.”

Clinton specifically targets certain current benefits, including by proposing to end the “Bermuda reinsurance loophole” and tax gaming through complex derivative trading. “High-income money managers have used loopholes related to foreign reinsurance — often located in Bermuda — to avoid paying their fair share. And they take advantage of complex derivative trades to lower their tax bill,” according to Clinton campaign materials that said she would build on proposals from President Obama and Republicans in Congress to close down the two “loopholes.”

She would also “impose a tax on harmful high-frequency trading and reform rules to make our stock markets fairer, more open, and transparent,” and end tax subsidies for the oil and gas industry. Clinton has proposed a 15% tax credit for companies that share profits with workers, with the US$20 billion cost paid for through the closure of tax loopholes that she will identify as part of an agenda to be detailed later.

To a large extent, Clinton’s tax plan continues the general themes and many of the specific proposals of the Obama administration. She promises to be the candidate to make “those at the top pay their fair share of taxes,” including through: the “Buffett Rule” proposal that calls for an effective tax rate of 30% on those making more than US$1 million per year; a new tax on multimillionaires (a 4% “Fair Share Surcharge” on Americans who make more than US$5 million per year); and eliminating the preferential tax treatment of carried interest.

Under Clinton’s capital gains proposals:

  • Gains from assets held less than two years taxed at 39.6% (+3.8% NIIT)
  • Gains from assets held two to three years taxed at 36% rate (+3.8% NIIT)
  • Thereafter, rate declines by 4 percentage points each year asset held until reaching 20% (+3.8% NIIT) at year six

On 23 August, Clinton unveiled a small business package that calls for: allowing small businesses to immediately expense up to US$1 million in new investments; 100% tax exclusion on capital gains for long-term small business investments; expanding and making permanent the New Market Tax Credit; and a new standard deduction for small businesses.

On 22 September, Clinton updated her campaign materials to reflect an increase in estate taxes over what she previously proposed, including up to a 65% rate on estates worth US$500 million (US$1 billion for couples), and her intention to limit the tax benefits of like-kind exchanges that she said are used to prevent capital gains taxation on certain sales.

Clinton’s previous position on the estate tax was a return to the 2009 regime of a US$3.5 million exemption and 45% rate. This position has been updated to add higher rates on larger estates that Senator Bernie Sanders (I-VT) proposed during his presidential campaign. A previously released Clinton fact sheet on “Investing in America by Restoring Fairness to Our Tax Code” — which continues to repeatedly reference a desire to dismantle the “private tax system” for the wealthy — was updated to retain that proposal but “go further than that for estates valued in the tens and hundreds of millions, with higher rates as values rise, up to a 65% rate on estates valued at over US$1 billion per couple.”

The Committee for a Responsible Federal Budgets, which first detailed the new proposals, said Clinton adopted the Sanders proposal of a 50% rate on estates between US$10 million-US$50 million, 55% rate for estates in excess of US$50 million, then the top rate of 65%.  

The updated document also reflects Clinton’s intention to eliminate the “step-up in basis” that allows accumulated capital gains to go untaxed when assets are passed on to heirs, and to treat bequests as a realization event. The document said her proposal will “include exemptions to ensure this change only affects the high-income families who by far benefit the most from this loophole, and protects middle-class families;” and “contain careful protections and flexibility for small and closely-held businesses, farms and homes, and personal property and family heirlooms.”

The document also reflects Clinton’s intention to “rationalize the Affordable Care Act’s net investment income tax to prevent gaming by high-income taxpayers.”

Hillary Clinton — proposed capital gains rates

Holding period

Clinton rate

Current top rate

Less than 1 year

43.4%

43.4%

1–2 years

43.4%

23.8%

2–3 years

39.8%

23.8%

3–4 years

35.8%

23.8%

4–5 years

31.8%

23.8%

5–6 years

27.8%

23.8%

6+ years

23.8%

23.8%

This article is included in issue 18 of EY´s Global tax policy and controversy briefing.

CONTACT

Chris Sanger

EY Global Tax Policy Leader

csanger@uk.ey.com

+44 20 7951 0150

 

Rob Hanson

EY Global Tax Controversy Leader

rob.hanson@ey.com

+1 202 327 5696

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