Our next president may have the opportunity to enact significant federal tax reform. This begs the question: How do Donald Trump and Hillary Clinton differ on proposed tax changes? Not surprisingly, the differences are significant, particularly as to who would benefit, who would be harmed, and the effect on our federal deficit.
Donald Trump would simplify our progressive taxation system by reducing the number of tax brackets from seven to three – 12%, 25% and 33%. To fund these rate decreases, he would eliminate some of the itemized deductions the current law allows, especially for higher-income taxpayers. However, the mortgage interest and charitable donation deductions would be available at full value for taxpayers of all incomes. Additionally, both the marriage penalty and the alternative minimum tax would be eliminated. Mr. Trump would reduce the corporate tax rate from 35% to 15%and eliminate the corporate alternative minimum tax. However, Mr. Trump has not been clear on his tax policy regarding small businesses and pass-through entities. Mr. Trump stated that he would tax all business income at the 15% rate, including income from flow-through entities and income earned by independent contractors. Mr. Trump would also eliminate the estate and gift tax, the 3.8% net investment income tax and the additional Medicare tax on wages, compensation or self-employment income of qualifying taxpayers. Mr. Trump would maintain the current highest income tax rate on qualified dividends and long-term capital gains at 20%. Unrepatriated foreign earnings would be allowed back into the United States at a cost of a 10% repatriation tax. Income from so-called “carried interest” would be taxed at the ordinary income tax rates with a top tax rate of 33%. Finally, Mr. Trump is proposing to allow taxpayers to fully deduct the average cost of child- care expenses.
Contrast Donald Trump’s proposals with those of Hillary Clinton. Secretary Clinton would impose a four percent surcharge on taxpayers’ income over five million dollars per year. Taxpayers with adjusted gross income in excess of one million dollars would also face a 30% minimum tax rate--the so called “Buffet rule” and those with adjusted gross income over $5,000,000 would face a 4% surtax. Itemized deductions would be capped at a 28% tax value. Long-term capital gains would be taxed at varying rates between 20% and 39.6%, depending on the holding period--more than 6 years for the lowest tax rate to less than 1 year for the highest tax rate. Secretary Clinton’s other proposals include limiting the total value of retirement accounts, taxing estates at four different tax brackets depending on the value of the estate (after the applicable credit amount):45% for estates under $10,000,000, 50% for estate over $10,000,000, 55% for estates over $50,000,000, and 65% for estates over $500,000,000, for individuals and $1,000,000,000 for married couples (however, the marital deduction could eliminate that tax) with a $3,500,000 exemption; and taxing carried interest at ordinary income tax rates. In addition, Secretary Clinton’s estate tax plan would disallow a basis step-up on bequests from estates of high-income taxpayers, deeming those bequests as income realization events to the estate (resulting in the payment of capital gains tax). This limitation would not apply to bequests of small and closely-held businesses, farms, homes, and personal property and family heirlooms. Secretary Clinton would also allow up to a $1,200 tax credit for child-care expenses and revamp and expand the child tax credit to provide more benefits for low-income families and for eligible families with children age 4 and under. While there would be tax credits for businesses that invest in community development and infrastructure, hire apprentices or share profits with employees, there would be no reduction of the corporate tax rate; however, Secretary Clinton would limit the use of like-kind exchanges.
Lots of questions remain unanswered. If Donald Trump eliminates the estate tax, would there still be a basis step-up in assets held at death? Will Donald Trump revisit his original tax proposal regarding small businesses and pass-through entities, and if so, how would he deal with employees who wish to become independent contractors to take advantage of the low 15% rate. And, as always with major tax reform, how will the government generate revenues to replace the reduction in tax dollars received? Finally, if under Hillary Clinton’s tax plan the corporate tax rates remain unchanged, would this hurt U.S. businesses ability to compete in the global environment? Stay tuned.
To download an exclusive report exploring business leaders’ reactions to proposed tax changes in light of the election, click here.