Earlier this year, Republicans in the House of Representatives released their vision for comprehensive tax reform. We noted that the plan would have far-reaching implications for the commercial real estate industry, and that final disposition of tax reform would depend on the winner of November’s presidential elections. The Democratic nominee, Hillary Clinton, put forth her tax plan earlier in the year; her Republican counterpart, Donald Trump, proposed a plan that he and his advisors began revising soon after he won the GOP nomination in response to criticism that his plan would be too costly.
Last week, Trump finally released many of the details and revisions to his original plan that he and his advisors had said would be forthcoming, allowing a more fair comparison with the Clinton proposals. Being presidential campaign documents, both remain broad policy proposals geared to achieving political objectives, rather than providing detailed legislative language as to the implementation of the proposals. Details aside, however, it is difficult to imagine two plans that are more different in the direction they take on future tax policy.
Trump’s tax plan adheres to a great extent to traditional Republican orthodoxy on taxes: reduce rates and broaden the tax base by eliminating preferences, thereby stimulating economic growth. His original plan released last year had been pegged by some experts as increasing the federal debt by almost $10 trillion over the next decade. His revised plan, which includes a higher top individual income tax rate (increased from 25 percent to 33 percent), would reduce the revenue loss, but final numbers are hard to come by because Trump and his campaign have given differing accounts regarding the tax treatment of small businesses and partnerships. Putting that issue aside, the Trump plan would still represent a sizeable tax cut for individuals and businesses. In terms of tax reductions, the Trump plan would:
- Simplify the code by consolidating the existing seven tax brackets into three, with ordinary income rates of 12, 25 and 33 percent;
- Tax capital gains at 20 percent, and eliminate the 3.8 percent (“Obamacare”) tax on investment income;
- Increase the standard deduction (from $6,300 to $15,000 for singles; from $12,600 to $30,000 for married couples filing jointly).
- Eliminate the alternative minimum tax;
- Reduce the corporate income tax rate from 35 to 15 percent.
Trump proposes to tax carried interest compensation at ordinary income rates rather than as capital gains, although his rate reductions would mitigate somewhat the impact of that change. The extent of his reduction in corporate taxes, and whether it also applies to pass-through entities (partnerships and LLCs) remains murky, however. The campaign’s Fact Sheet states the rate is “available to all businesses, both big and small” but qualifies it to those that “want to retain the profits within the business.”
Hillary Clinton’s tax proposals go in a totally different direction, intended to achieve goals that have become much more prominent for national Democrats. The Clinton plan would impose higher taxes on high-income individuals to address income inequality. Clinton’s tax increases would also fund many of her domestic policy proposals, including a college affordability plan and additional spending on infrastructure. Estimates differ as to the revenue raised by the Clinton tax increases, with the conservative-leaning Tax Foundation estimating $498 billion over ten years, while the more liberal-leaning Tax Policy Center estimates that revenues will increase by $1.1 trillion in the first decade.
Clinton’s plan would:
- Enact a 4 percent surcharge on adjusted gross income (AGI) over $5 million, increasing the top rate on ordinary income from 39.6 percent to 43.6 percent;
- Impose a 30 percent minimum tax on taxpayers with AGI above $1 million;
- Limit the value of specified deductions and exclusions to 28 percent.
- Create a new schedule for capital gains, with rates declining based on duration of holding period (less than two years taxed as short-term gain at ordinary income rates; 23.8 percent rate only if held for at least six years);
- Tax carried interest at ordinary income tax rates.
- Maintain current corporate tax rates and eliminate provisions that reduce corporate taxable income.
In contrast to Trump’s plan, Clinton’s has been relatively detailed and transparent, and has been characterized as more fiscally responsible by budget experts because her spending proposals are paid for by tax increases. However, instead of broad tax reform and simplification, the plan has been criticized as making the tax code more complex. James Stewart of The New York Times wrote that her proposal to create a sliding scale for capital gains was described to him as “fiendishly complicated and ineffectual” by tax experts.
Questions remain as to the details of each candidate’s plans. But clearly, Trump and Clinton have put forth plans designed to appeal to their respective political bases, which will in turn make these plans lightning rods in Congress for whichever one becomes president.