On the Issues: Tax plans split both parties and candidates
Taxes are a broad and often complex policy area. While every candidate proposes some combination of taxes on income and consumption, the activities and transactions being taxed can vary wildly from candidate to candidate. Economists are split on the issue as well, finding consumption taxes to be more predictable and stronger drivers of government revenue while income taxes are less of a burden on the poor and prevent money from piling in places where it will just be saved. Furthermore, taxes on capital gains, financial transactions, and other things often have a dampening effect on those activities for better or worse. The five remaining candidates each have unique positions on taxation.
Senator Ted Cruz (R–TX)
Ted Cruz’s tax reforms center around criticizing the complexity of the tax code and its progressive nature. He feels that the difficulty of reading through America’s current federal tax code makes it harder for less wealthy citizens to identify deductions on their taxes. This leads to significant errors and wasteful spending on filing, as well as a cost burden on Americans who need professional help to file their taxes. This is a common concern among economists, and Cruz feels his plan addresses this problem directly. He wants to make collecting taxes so simple that he plans to abolish the IRS in favor of a tax code that allows taxes to be paid on a postcard or an iPhone app. He also wants to remove tax brackets to create a flat 10 percent tax on all Americans.
Cruz’s plan supposedly works for all Americans on multiple levels. He believes that the lowered tax will create more jobs by freeing up money from the wealthiest citizens who have hiring power, which will lead to things like increased opportunities and wages. He also plans to directly increase after-tax income by expanding the earned income tax credit (EITC).
In addition to income tax reform, Cruz also plans to implement a sizable consumption tax that he calls the Business Flat Tax. He’ll deny it if you ask him, but this is a European-style value-added tax (VAT). It taxes the revenue of a company adjusted for the expenses that company undergoes for business operations.
The nonpartisan Tax Policy Center agrees with Cruz on most of these points, saying that they could even drive up growth as far as 14 percent. They are less enthused with the potential outlook for revenue, saying that the national debt could explode if spending is not cut significantly.
Ohio Governor John Kasich
Kasich has proposed a significant, across the board tax cut. He wants to cut the top marginal income tax rate from 39.6 percent to 28 percent. In addition, he wants to reduce the capital gains tax to 15 percent and the corporate tax rate from 35 percent to 25 percent.
Kasich claims that these cuts will allow more money to flow into the private sector and create more jobs and opportunities for citizens. He also wants to expand credits such as the EITC by as much as 10 percent to give citizens a top-up on their wages and the research and development credit for small businesses to allow them to create jobs.
Kasich’s tax plan also addresses repatriation of foreign capital in a unique way. First, the lower corporate tax will lower operating costs on businesses within the United States. Additionally, territorial taxes would restrict taxation to profits in the country in a manner more similar to other nations. By no longer double taxing their business ventures, this would incentivize companies to return to the United States.
Kasich’s plan has avoided a detailed analysis by the Tax Policy Center or the Tax Foundation, so it is difficult to evaluate, as analyses tend to be partisan and not particularly informative.
Businessman Donald Trump
Trump’s tax plan is a large hunk of red meat for the conservative base. Trump massively shrinks income taxes, cutting tax rates for nearly all Americans. The proposed marginal tax rate is 0 percent for people earning under $25,000, 10 percent for people earning between $25,000 and $50,000, 20 percent for people earning between $50,000 and $150,000, and 25 percent for people making above $150,000. The income brackets would be doubled for couples and multiplied by 1.5 for heads of households. He also wants to cut long-term capital gains taxes and restrict the itemized tax returns that many people use to cut large amounts of their income taxes.
Trump has also proposed a one-time tax holiday where people can bring their money back to the United States at a vastly decreased tax rate in order to repatriate foreign capital and a lower corporate tax rate to prevent restrictions on the growth of businesses.
The Tax Policy Center has said that the Trump plan could increase work incentives and grow the economy. The same report also says that the national debt could explode out of control by as much as 80 percent of GDP unless the plan was accompanied by significant spending cuts.
Former Secretary of State Hillary Clinton
Secretary Clinton’s tax code hits the wealthiest Americans hard, increasing tax rates and adding extra regulations to make sure that Clinton’s agenda is not financed through taxes on the poor and middle class. In addition to a higher top marginal rate, Clinton plans to impose the “Buffett Rule,” a requirement that at least 30 percent of the income of top earners is paid in taxes and a cap on tax breaks at 28 percent is put in place. Further, Clinton wants to impose a progressive capital gains tax on short-term investment with the tax rate dropping to 20 percent and staying static after six years on an investment. She says this will combat “quarterly capitalism” and the boom and bust cycles of Wall Street. Clinton will also tax carried interest as normal income, meaning investors will see an uptick in their taxes.
Clinton also wants to use tax credits as a carrot for companies that implement revenue sharing and return a portion of their profits to their workers instead of only to the shareholders. Clinton this would make jobs more lucrative and take a significant hack at income inequality in a way taxation and spending cannot.
The Tax Policy Center has said Clinton’s plan will raise $1.1 trillion in revenue. The same analysis said that it was possible that Clinton’s plan would reduce incentives to work and spend but that the damage to the economy would be limited.
In addition to having taken a pledge not to raise taxes on Americans earning less than $250,000 a year, Clinton has claimed that a significant tax cut for those poor and middle class families is forthcoming. This could affect the projections about her tax plan in terms of revenue as well as economic effects.
Senator Bernie Sanders (I–VT)
Sanders has proposed unleashing a bevy of taxes on the wealthiest Americans. His most obvious tax raise would be a tax increase for those making above $250,000 a year, including a marginal tax rate as high as 52 percent for those making over $10 million each year.
Sanders also plans to tax capital gains and (this is unclear from the text of his plan but he refers to it in one of his bullet points) carried interest as income and raise payroll taxes by 2.2 percent in order to pay for his programs.
In addition to taxing income, Sanders also has proposed taxing financial transactions at a rate of 0.5 percent in an attempt to slow high frequency trading, which he believes is a threat to the economy.
The Tax Policy Center has said that, while Sanders’ plan would raise stunning amounts of revenue — the estimate is in excess of $15 trillion — and while the vast majority of it would be from the rich, every American would see a sizable increase in their tax burden.
Sanders has bristled at the notion that he is increasing the burden on every American, saying that an analysis of the tax policy without an analysis of his spending is unfair, especially since his tax plans are always released jointly with what they pay for. While capital gains tax increases and a financial transaction tax would vastly increase the costs of traditional tenets of the American dream such as homes and cars, it seems that Sanders is making the trade-off that a higher wall between the middle class and the wealthy is worth a more accessible path to the middle class from poverty. His tax plan, however, is certain to raise both the capacity of the government to spend and the amount each citizen contributes to financing it.