Whereas the term “tax policy” is usually synonymous with “tax cuts” in the Republican candidates’ lexicon, for Hillary Clinton, tax policy is a means to other ends.
Those ends might be to: offset increased spending, finance new programs, redress income inequality or influence taxpayer behavior with respect to investment and employment. Unlike Senator Cruz’s transformational tax reform program, Secretary Clinton’s proposals tinker around the edges of the existing tax code — tweaking rates for some, decreasing or eliminating some deductions, adjusting the timing on others, and adopting or expanding many of President Obama’s proposals from his most recent budget.
However, the one marked difference between Clinton’s version of tax policy, and that of all her Republican rivals, is that hers increases net tax revenues to the tune of nearly $1.1 trillion over 10 years, according to the Tax Policy Center (TPC)1.
Using the TPC’s study of the Clinton Plan, we can better understand the impact of provisions that affect private companies on federal revenues, under the assumption that an increase in federal revenues represents an increase in private companies’ tax obligations. However, an evaluation of federal tax receipts will not capture the knock-on effects for state and local taxes (e.g. effective state rates should increase as federal income tax deductions are curtailed or eliminated for states that accept all or some federal deductions).
Nor does it account for the proposals’ dynamic impact on economic growth, which can vary significantly across economic models. Finally, the study does not take into account the reputed Clinton proposal for middle and working class tax relief that her campaign has yet to release.
The TPC identifies a number of provisions in the Clinton plan that would affect private companies and their owners, including:
Individual Income Tax
- Levy a 4 percent surcharge on AGI over $5 million.
- Require a 30 percent minimum tax on AGIs over $1 million (i.e., the “Buffett Rule”). Taxes counted toward the new minimum tax include regular income taxes, including the ACA surtax, the AMT, the above-mentioned 4 percent surcharge, and the employee portion of the payroll tax. The minimum tax would phase in for taxpayers with an AGI between $1 and $2 million, i.e. the taxpayer would owe a proportionate share of the difference (e.g., an AGI of $1.25 million would owe the difference times 0.25). Taxpayers with an AGI of $2 million or greater would pay the full difference. The phase in thresholds would be half as large for married couples filing separately.
- Enact a 28 percent ceiling on the tax value of: all itemized deductions (except for charitable contributions), tax-exempt state and local bond interest, employer-sponsored health insurance paid for by employers or with before-tax employee dollars, health insurance costs of self-employed individuals, employee contributions to defined contribution retirement plans and IRAs, the deduction for income attributable to domestic production activities, certain trade or business deductions of employees, moving expenses, contributions to health savings accounts and Archer MSAs, and interest on education loans. This cap effectively reduces the value of these deductions and exclusions for taxpayers in the 33 percent and higher tax brackets.
- Impose a new tax schedule for capital gains, with rates declining roughly 4 percentage points per year as the holding period increases. Assets held less than two years would be taxed at ordinary income tax rates. The current 23.8 percent capital gains rate would only apply to assets held six or more years.
- Treat carried interest as ordinary income for tax purposes.
- Prevent taxpayers with very high balances in tax-favored retirement accounts from making additional contributions when the sum of all their account balances reaches a level adequate to finance the maximum annuity currently permitted for defined benefit plans.
- Mark-to-market derivative contracts annually, with the resulting gain or loss treated as ordinary income.
- Grant tax credits for caregiving expenses for elderly family members and high out-of-pocket health care expenses.
Estate and Gift Taxes
- Readjust the tax threshold for estates back to $3.5 million ($7 million for married couples), not indexed for inflation, and move the top tax rate to 45 percent. Set the lifetime gift tax exemption at $1 million unindexed.
- Mandate consistency between valuations for estate and gift taxes and those used for income tax purposes, and modify the rules for grantor trusts.
- Reduce the 80 percent “inversion test” to 50 percent, before a U.S. company can give up its U.S. tax residence.
- Levy an “exit tax” on the accumulated untaxed earnings of foreign subsidiaries of any U.S. company that voluntarily leaves the U.S. or is acquired by a foreign company.
- Limit U.S. interest deductions for U.S. affiliates of a multinational if the company’s share of net interest expenses for U.S. tax purposes exceeds its share on consolidated financial statements to deter “earnings stripping.”
- Assess a “risk fee” on the largest financial institutions.
- Impose a high-frequency trading tax on excessive cancellations.
- Invalidate the deduction for excess nontaxed reinsurance premiums paid to affiliates.
- Limit the “performance-based” tax deductions for compensation of highly-paid executives of top public companies.
- Eliminate tax incentives for fossil fuels including expensing of intangible drilling costs, percentage depletion, and the deduction for domestic manufacturing for production of oil, natural gas, and coal. Also, subject tar sands oil to the excise tax levied to finance the Oil Spill Liability Trust Fund.
- Provide tax credits for specific business activities, including credits for businesses that hire workers from an apprentice program, share profits with employees, or invest in distressed communities and infrastructure.
- Reauthorize and expand the Build America Bonds program that expired in 2010.
Tax Revenue Effects
The TPC estimates the Clinton Tax proposals would increase federal tax revenues by $1.08 trillion by 2026. On the plus side, creating incentives for community development and infrastructure would reduce federal revenues by $8.7 billion (B) through 2026. In addition, the Clinton campaign is in the process of developing a proposal for lower and middle class tax relief, which it intends to release closer to the election and which would presumably lower federal tax revenues by a yet unknown amount.
On the negative side, the largest increases in federal tax revenues ($406B over ten years) comes from the 28 percent cap on the tax value of itemized deductions and other tax expenditures. The 4 percent surcharge on AGIs over $5 million brings in $126B and the 30 percent minimum millionaires’ tax will cost those taxpayers another $119B through 2026.
The international tax changes (inversion test, exit tax and earnings stripping provisions) will cost corporate taxpayers $92B over 10 years, while the new capital gains tax rate schedule will take an additional $84B in the first 10 years. Eliminating fossil fuel tax incentives will gain the federal government $58B from individual and corporate taxpayers over the same period. Repealing carried interest, marking derivatives to market, and limiting tax deferrals in retirement will cost taxpayers a combined $40B through 2026.
Finally, enacting Clinton’s proposed estate and gift tax reforms would realize additional federal tax revenues of nearly $161B in the first 10 years. The remaining proposals are not sufficiently detailed to develop meaningful revenue estimates.
Economic and Distributional Effects
The federal gain in revenues from the Clinton proposals would have a small effect on economic growth (negative or positive) due to the fact that they constitute only about half a percent of gross domestic product (GDP) (probably smaller given the unknown offsetting impact of her tax relief programs), compared to Trump’s proposals, which decrease tax revenues by 4 percent of GDP, and Cruz’s, which decrease federal revenues by 3.6 percent of GDP2. Furthermore, whatever positive impact the additional revenues might have would be dependent upon whether they were used to reduce federal deficits or spent on new programs – with at least some going to tax relief and other tax incentive programs.
Nonetheless, the Clinton proposals will have a dilatory effect on investment and savings, but largely for those taxpayers in the top quintile. The average effective marginal tax rates on long-term capital gains (those held for more than one year) would rise by almost 10 percentage points for taxpayers in the top 0.1 percent. The higher rates levied on individuals’ dividends and capital gains would also raise the corporate cost of capital.
The impact on investment is not shared equally between corporations and pass-through entities. The marginal effect tax rate (METR)3 on new corporate investment would rise from 25.7 to 28 percent (2.3 percentage points) in 2017, while the METR for pass-throughs would grow from 19.1 to 19.9, or .8 percentage points. Because the largest tax changes affect returns to corporate equity, Clinton’s proposals would reinforce two current biases in the federal tax system that favor pass-through entities over corporations and debt over equity financing.
Under the Clinton proposal, 94.2 percent of the increase in federal taxes would be borne by the top 20 percent of taxpayers, while the top 1 percent would pay 77.8 percent of the additional tax liability in 2017. This would mean, ceteris paribus, a 1.7 percent decrease in after-tax income for the top 20 percent of taxpayers, and a 5 percent decrease in after tax income for the top 1 percent of taxpayers in 2017. There would be less than 0.1 percent increase in taxes for the remaining four quintiles, and a similar impact on their after tax income.
The Clinton tax proposals are clearly not meant to be comprehensive tax reform in the way the plans of the Republican candidates are. Clinton’s proposals are designed to extend and build upon Obama’s tax policies, with many of the same underlying policy goals.
1 Tax Policy Center, “An Analysis of Hilary Clinton’s Tax Proposals”, Urban Institute and Brookings Institution, March 3, 2016, p. 1.
2 Tax Policy Center, “An Analysis of Ted Cruz’s Tax Plan”, Urban Institute and Brookings Institution, February 16, 2016, and Tax Policy Center, “An Analysis of Donald Trump’s Tax Plan,” Urban Institute and Brookings Institution, December 22, 2015.
3 METR is a forward-looking measure of the impact of the tax system on the rate of return of a hypothetical marginal (i.e., just break-even) investment project, TPC, p.15.•