This is an unbiased comparison of the proposed tax plans released by Hillary Clinton and Donald Trump. In many ways, their tax policy aligns broadly with the platform of their political party — Clinton wants high-income earners to pay a larger percentage of their income in taxes, while Trump wants to cut taxes for all income levels.
We look at not only the specific proposals of each candidate's tax plan but also the impact these proposals will have, as estimated by third-party analysts.
For a detailed comparison of both candidates on all issues in the campaign, see Hillary Clinton vs Donald Trump.
Update Aug 12, 2016: On August 8, Trump delivered a speech in Detroit outlining a revised economic policy and new tax proposals that are different from what he had proposed earlier. This comparison was written before this speech so we have included both his old and his new proposals. However, the Trump campaign has removed from their website some documents that we had referenced (and cited) to describe his earlier proposals.
|Donald Trump's Tax Plan||Hillary Clinton's Tax Plan|
|Tax Philosophy||Cut taxes for everyone||Increase taxes, especially on high-income earners.|
|Tax Brackets - Ordinary Income||Three - 12%, 25%, 33%. Earlier proposal: 10%, 20%, 25%||Eight - 10%, 15%, 25%, 28%, 33%, 35%, 39.6%, 43.6%|
|Tax Brackets - Investment Income||Three - 0%, 15%, 20%||Complex. Long-term gains will be redefined to assets held > 6 years. Tax rates of 0%, 15%, 20% and 24% on long-term. Additional surcharges on some. Higher rates for all if assets held for fewer than 6 years.|
|Net Investment Income Tax||Repeal||Retain|
|Estate Tax||Repeal||Retain and expand. Increase tax rate from 40% to 45%; and add new tax brackets for 50%, 55% and 65% for estates worth more than $10 million, $50 million and $500 million respectively.|
|Impact on GDP||Positive 11% (as estimated by the Tax Foundation)||Negative 1% (as estimated by the Tax Foundation)|
|Impact on Job Creation||Positive. 5.3 million new jobs (as estimated by the Tax Foundation)||Negative. 311,000 fewer jobs (as estimated by the Tax Foundation)|
|Impact on Government Debt||Negative. $10 trillion higher government debt (as estimated by the Tax Foundation)||Positive. $191 billion lower national debt (as estimated by the Tax Foundation)|
|Impact on Wages||Positive. +6.5% wage growth (as estimated by the Tax Foundation)||Negative. -0.8% wage growth (as estimated by the Tax Foundation)|
|Biggest Beneficiaries||High-income earners||Low-income earners|
A majority of proposals by both candidates revolve around income taxes levied on individuals. The tax system in America is progressive. This means that as annual income rises, a larger portion of that income is required to be paid in taxes. e.g. for single filers in 2016, the tax rate on the first $9,275 of income is 10% but it rises to 15% for income between $9,275 to $37,650, and keeps rising up to a maximum of 39.6% for $415,050.
However, there are some "loopholes" in the tax code where certain types of income is taxed at a lower rate. e.g. income from long-term capital gains is taxed at a maximum of 20% even if that income is millions of dollars. Some critics argue that this discrepancy between the tax rates on labor/wages and investment income is unfair. It's the reason why Warren Buffett pays lower portion of his income in taxes than most of his employees.
Clinton's Plan for Individual Taxes
Clinton's proposals are mostly about closing these "loopholes". Highlights of her tax plan include:
- A tax surcharge of 4% on income over $5 million. This would create a new tax bracket of 43.6% (39.6 + 4) for incomes over $5 million. All other tax brackets would stay the same as outlined in the chart above.
- "Buffett Rule" mandating a minimum 30% tax rate on people with income over $1 million. Some people generate a majority of their income from investments that are taxed at a lower (capital gains) rate. This rule would reduce the tax benefit of investment income for people making more than $1 million in a given year.
- All itemized deductions would be capped at a tax value of 28%. Itemized deductions tend to favor people in higher tax brackets. e.g. a mortgage interest deduction of $10,000 reduces your tax liability by only $1,500 if you are a married couple in the 15% tax bracket (annual income < $75,300). But if you are in the 35% marginal tax bracket (income between $413,350 and $466,950), then the tax savings on the same $10,000 mortgage interest deduction is $3,500. Clinton's proposal is to limit the tax benefit of all itemized deductions to 28%. So in this scenario, the tax savings would be capped at $2,800 for $10,000 in mortgage interest. Naturally, this provision only affects people who are in a tax bracket higher than 28%.
- Increase tax rate tiers on capital gains. Currently there are only two tiers in which capital gains are divided — short-term (assets held < 1 year) and long-term (assets held > 1 year). The idea behind this system is to reward long-term investment rather than speculation. If assets are held long-term before being sold for a profit, they are taxed at a lower rate than short-term gains. Clinton wants to increase the number of tiers to seven (< 1yr, 1-2 yrs, 2-3 yrs, and so on with the lowest tax rate bracket for assets held for more than 6 years).
- Limit the amount of money that can be saved in tax-advantaged retirement accounts like IRAs and 401k accounts. Clinton believes these tax-advantaged accounts have been misused to shelter a lot of income from taxes, even though the IRS imposes limits on how much money can be contributed to such accounts every year. Her tax plan proposes to impose more limits on how much total value these accounts can accrue.
- Carried interest should be taxed at ordinary income tax rates. Carried interest is the performance fee paid to an investment manager, usually based on the returns generated by the manager for the investment fund. In a longstanding — and long controversial — loophole, carried interest is taxed at the capital gains tax rate, which is significantly lower than the tax rate for wages. Multiple legislative attempts to raise this tax rate have failed.
- A $1,200 tax credit for caregiver expenses
- Increase the estate tax a.k.a. "death tax" from 40% to 45%; and reduce the exemption for estate tax from $5.45 million to $3.5 million.
Trump's Tax Plan for Individuals
Taxes are a complex issue. For example, not everyone agrees that a lower tax rate for capital gains is a loophole. Similarly, taxing income from dividends can be considered double taxation because dividends are company profits distributed to shareholders. Companies have already paid taxes on their income, and dividends are distributed from the company's net, after-tax income.
The Republican view on taxes is that lower taxes stimulate economic activity. This in turn results in higher revenue for the federal government because the pie is larger, even though the government's share of the pie is smaller.
In line with this Republican position, Trump's tax plan advocates tax cuts for all income levels. Highlights of Trump's tax plan include:
- Reduce the number of tax brackets Trump had advocated having only 4 tax brackets — 0%, 10%, 20% and 25%. This meant the highest tax bracket would be significantly lower than it is today. So high income earners would benefit the most from these tax cuts; although people at all income levels will have a lower tax bill. In August, Trump released a revised economic plan where the proposed tax rates were: 12%, 25%, 33%. While still lower than the current tax regime, this is higher than his original proposal and is intended to address criticism that his tax plan would be very expensive and therefore increase government debt.
- Increase standard deduction to $25,000 per person
- Taxes on dividends and capital gains to be capped at 20% Currently there is a surcharge on certain investment income from dividends and capital gains that was imposed to fund Obamacare. For example, Trump's plan would repeal the Net Investment Income Tax (NIIT), which was applied to fund the Affordable Care Act (a.k.a. Obamacare). This tax — currently 3.8% — applies to investment income for households earning more than $250,000.
- Repeal the AMT (alternative minimum tax). The AMT was imposed to ensure that people with incomes over a certain level pay at least a certain portion of it in taxes. The intent was similar to the Buffett rule proposed by Clinton. However, over the years the thresholds for AMT have not always kept pace with inflation and it has made the tax code more complicated, while ensnaring a wider percentage of the population than originally intended.
- Repeal the estate tax and gift tax. Republicans argue that estate taxes (a.k.a. "death tax") and gift taxes are unfair because the person gifting, or the person who passed away whose estate is now changing hands, already paid taxes on the wealth being transferred. When taxes are imposed on gifts or inheritances, the government is in effect double-dipping. Trump wants to eliminate both these taxes.
- Carried interest to be taxed as ordinary income rather than the lower capital gains tax rate. In a departure from traditional Republican politicians, Trump's plan actually agrees with Clinton's that carried interest should be taxed as ordinary income.
Republicans call the estate tax the "death tax" because it is levied on an individual's estate upon his or her death when the wealth is inherited by heirs. The tax is the subject of much debate among economists and policy analysts. Several prominent arguments for and against the estate tax are summarized here.
Donald Trump, like most Republicans, wants to repeal the estate tax. In contrast, Hillary Clinton wants to raise this tax. Currently estates smaller than $5.45 million are exempt from the estate tax; wealth over this amount is taxed at 40%. Clinton first proposed a higher tax rate (45%) and a lower threshold ($3.5 million) for applying the tax.
Clinton's later revised her proposal to make it more progressive. Her latest proposal is the following tax brackets for estate tax: None (up to $5.45 million), 45% ($5.45 to $10 million), 50% ($10-50 million), 55% ($50 - $500 million), 65% for wealth greater than $500 million.
Analysts have argued that increasing taxes as proposed by Clinton will not increase revenue for the government because virtually all large estates will find ways to avoid this tax through judicious estate planning.
Corporate income taxes are a big source of revenue for the federal government. Both candidates have some proposals to tweak the corporate tax system.
Highlights of Clinton's proposals for corporate taxes include:
- A new tax on high-frequency trading. High-frequency trading is used by financial trading firms to rapidly trade on stock markets, and in the process can increase the price paid by retail investors for the same securities. It increases risk without adding much value to the financial system.
- A tax credit for companies that institute profit-sharing plans with employees. Advocating for companies to share profits with their employees, Clinton's profit-sharing tax credit will apply for the first two years of a company's profit sharing program. The credit will be 15% of the profits shared, and be capped at a profit-sharing amount of 10% of the employee's annual wage.
- Close the "reinsurance premium" loophole where a company pays reinsurance premiums to its subsidiary in a foreign country.
Highlights of Trump's tax plan for companies include:
- Decrease corporate income tax rate from 35% to 15% A lower tax rate on businesses stimulates economic activity, and incentivizes companies to locate to the United States.
- Disallow deferral of corporate income taxes on foreign income. Bring corporate money currently overseas back to the U.S. via a one-time repatriation tax rate of 10%. This is the most substantive policy proposal for corporate taxes that has emerged from either candidate. American companies have billions of dollars held overseas. If this money was repatriated to the U.S., income tax would be due. So they have deferred bringing this money back. Trump's plan is to have a one-time relaxation in the repatriation rate to incentivize bringing all the money back into the country. After that, companies would be disallowed from deferring taxes on foreign income. U.S. citizens, as individuals, are required to pay taxes on all income — foreign and domestic. So the proposed rule would bring the laws in line so that corporations are not able to defer taxes on foreign income.
- Limits on how much interest expense can be tax deductible
The big idea of Clinton's tax plan is to raise taxes and Trump's plan calls for tax cuts. So under Clinton's plan, revenue for the federal government would rise and the budget deficit would shrink. On the other hand, Trump's plan would cost the federal government over $10 trillion over 10 years.
But that is not the full story. Trump's proposals would stimulate the economy, grow GDP and create more jobs; and supporters argue that this economic growth would compensate for the reduction in revenue. In simple terms, the pie will grow so even with a smaller share the government will not lose revenue.
While there is definitely merit to this argument, The Tax Foundation, a conservative-leaning research firm, has calculated that even accounting for this growth, the tax plan would cost over $10 trillion dollars over 10 years. This revenue deficit would directly increase the national debt.
Clinton's tax plan is not without its flaws either. Raising taxes, while it raises government revenue and helps reduce government debt, has a chilling effect on the economy. The Tax Foundation estimates that Clinton's plan would lower after-tax incomes of all taxpayers by at least 0.9%, and reduce GDP by 1% over the long-term.
Critics have called Clinton's profit-sharing plan complex and gimmicky. The plan suggests that after two years, "companies that have established profit sharing plans and enjoyed the benefits of them would no longer need the credit to sustain the plans." There is no evidence to indicate that this would be the case. It also offers no ways to fund the tax credit. Further, it smacks of too much government interference in how private companies structure compensation for their employees.
Another problem with Clinton's proposals on taxing capital gains is the sheer complexity it introduces. It's easy today for investors (and their brokers) to divide their capital gains into short-term and long-term based on whether the assets were held for more than one year. Dividing that into 7 different tiers would increase reporting complexity for financial institutions and tax filing complexity for individuals.
Moody’s Analytics, a subsidiary of the credit rating and research agency Moody’s Corp., has analyzed the economic policy proposals of both Clinton and Trump. The lead author of this analysis is Mark Zandi, a registered Democrat who has donated the maximum allowable amount of $2,700 to the Clinton campaign but who advised Republican Sen. John McCain in the 2008 presidential race. Mr. Zandi has predicted a Clinton victory since August 2015, so his bias must be noted.
The analysis by Moody's concluded that if all of Clinton's economic proposals were enacted, the economy would create 10.4 million jobs during her presidency and GDP would grow by 2.7% annually. Their forecast for maintaining the status quo is 7.2 million jobs and 2.3% GDP growth rate. more than expected under current law.
Moody's analysis of Donald Trump's economic proposals predicts a 1.4% GDP growth rate and 3.5 million fewer jobs than projected under current law.
While there are plenty of differences in the candidates' tax plans, voters often do not choose based on policy. In a light-hearted take on how people make decisions and later rationalize them, this video shows the reaction of Clinton supporters in New York when they were told about Trump's tax plan proposals.
- Donald Trump's Tax Plan (PDF) - Official Website
- Trump's Policy Position on Taxes - Official Website
- Clinton's Policy Position on Taxes - Official Website
- Analysis of Hillary Clinton's Tax Plan - The Tax Foundation
- An Analysis of Hillary Clinton's Tax Proposals - Tax Policy Center
- Trump Plans Tax Plan Rewrite - Politico
- Analysis of Donald Trump's Tax Plan - The Tax Foundation
- Analysis of Donald Trump's Tax Plan - Tax Policy Center
- Fact-checking Donald Trump's Speech on the Economy - The Wall Street Journal
- The Candidates and Your Taxes - PBS
- How Clinton and Trump Differ on Taxes - New York Times
- Trump vs Clinton on the Economy - CBS News
- Special Briefing: Tax Policies of the Major Presidential Candidates - Wolters Kluwer Tax & Accounting