And then there were three: a pre-convention look at the Presidential candidates’ individual tax reform plans
The end of the 2016 primary season is in sight, and while many significant (and some less significant) issues have received ample attention, taxes have played a somewhat less prominent role. Below is a summary of the individual tax reform plans of the last three candidates standing. Although many of these proposals are unlikely to become law, they nonetheless provide valuable insight into the underlying principles that will guide tax reform efforts from the next President.
Hillary Clinton would reform individual taxes by:
- Imposing the “Buffett rule” requiring taxpayers earning more than $1 million per year to pay at least 30% in taxes, and “broadening the base of income subject to the rule.”
- Enacting the “Fair Share Surcharge”—i.e., an extra 4% surtax on taxpayers who make more than $5 million per year.
- Cutting taxes for “hard-working families.”
- Establishing a 20% “caregiver credit” to help taxpayers offset up to $6,000 in caregiving costs (for a maximum credit of $1,200) for their elderly family members.
- Modifying the treatment of capital gains for taxpayers in the highest bracket by implementing a graduated holding period where the rate decreases, from 39.6% to 20%, over a 6-year period, to promote long-term investment.
- Limiting the tax value of certain tax breaks to 28%.
Bernie Sanders would leave the existing rates in place for married couples with income below $250,000 and single filers with incomes below $200,000. However, he would replace the existing top three rates (of 33%, 35%, and 39.6%) as follows:
- 37% on income between $250,000 and $500,000;
- 43% on income between $500,000 and $2 million;
- 48% on income between $2 million and $10 million; and
- 52% on income of $10 million and above.
Mr. Sanders would also replace the alternative minimum tax, personal exemption phase-out, and the limitation on itemized deductions with a provision limiting the tax savings for each dollar of deductions to 28¢ for “high-income households.”
In addition, he would repeal the favorable rates on capital gains and dividends for married couples with incomes over $250,000 (which would instead be subject to the otherwise applicable income tax rate), while retaining the existing favorable treatment for taxpayers who fall under that threshold. He would also increase the 3.8% surtax on net investment income to 10%.
The individual tax rates under Donald Trump’s tax plan would be:
- 0% for single filers earning up to $25,000, married filers earning up to $50,000, and heads of household earning up to $37,500;
- 10% for single filers earning $25,001 to $50,000, married filers earning $50,001 to $100,000, and heads of household earning $37,501 to $75,000;
- 20% for single earners earning $50,001 to $150,000, married filers earning $100,001 to $300,000, and heads of household earning $75,001 to $225,000; and
- 25% for single filers earning $150,000 and up, married filers earning $300,001 and up, and heads of household earning $225,001 and up.
The long-term capital gains and dividends rates would be:
- 0% for taxpayers in the 0% and 10% income tax rate brackets;
- 15% for taxpayers in the 15% income tax rate bracket; and
- 20% for taxpayers in the 25% income tax rate bracket.
According to Mr. Trump’s website, with these reductions in rates, “many of the current exemptions and deductions will become unnecessary or redundant.” His plan also calls for “steepening the curve” of the personal exemption and itemized deduction limitations. Taxpayers in the 10% brackets would keep “all or most” of their current deductions, those in the 20% bracket would keep “more than half” of their current deductions, and those in the 25% bracket would keep “fewer” deductions. Two of the most popular deductions, charitable giving and mortgage interest deductions, would remain unchanged for everyone.
