Clinton vs. Trump? A Taxing Decision in November

Now that the election process is to the point where the presidential nominees of the two major parties appear clear, it’s a good time to start considering their various tax plans. Although things can change, details will have to be determined and Congress will have its say, below are some of the current proposals from the two presumptive candidates.

Individual Income Tax
Donald Trump proposes just four brackets; Hillary Clinton proposes eight brackets.

trump clinton tax

Clinton caps itemized deductions at 28% of the deduction. Trump phases out all deductions except for the charitable deduction and the mortgage interest deduction.

The Alternative Minimum Tax (AMT)
Clinton creates a new minimum 30% rate on individuals earning over $1 million, while Trump eliminates the AMT.

Corporate Income Tax
Trump lowers the top corporate rate to 15%; Clinton has no specific proposal at this time.

Estate Tax
Clinton increases the top estate tax rate to 45% and lowers the estate tax exclusion to $3.5 million. Trump eliminates the estate tax.

Effect of Plans on the Deficit
And as a final note, you may also want to consider how these proposals will likely impact our federal deficit. Trump’s plan is projected to increase the deficit by $9.5 trillion over the next 10 years; Clinton’s is estimated to reduce the deficit by $1.2 trillion over that same period of time.

What You Should Know About ‘The Cliff’

Much has been written and said about the fiscal cliff. This summary and analysis from the Tax Foundation notes that the current situation "is the culmination of a decade of ‘temporary’ tax and budget bills that have postponed resolution of key policy differences." It looks ahead to the next steps. An example:

Estate Tax Increase
The estate of an individual who dies on December 31, 2012 will pay a federal estate tax (or death tax) of 35 percent on anything above $5.12 million. If the decedent instead passes away the next day, and Congress has not yet acted to change the law, the estate will instead owe a 55 percent tax on anything above $1 million. Even President Obama, no defender of estate tax repeal, considers this level too high: he has urged a compromise proposal of a 45 percent tax on estates over $3.5 million. Republicans generally support complete repeal of the tax.

There are few taxes that are as polarizing as the estate tax. A 2009 poll by the Tax Foundation found that the estate tax is viewed by taxpayers as the most "unfair" of all federal taxes but at the same time the estate tax seems to be a rallying point for those that agitate for redistribution through the tax code.[3] (In 2009, the estate tax raised about $20 billion, from a very small number of estates.) Opponents argue that the estate tax can break down family businesses while creating large compliance costs which are a drag on the economy.

Despite this seeming rift, there is a large and growing body of research by economists that generally lean left-of-center pointing toward repeal of the estate tax.[4] Nobel laureate economist Joseph Stiglitz, who served as chairman on Bill Clinton’s Council of Economic Advisors, authored a paper which argued that the estate tax actually increases inequality by reducing savings and driving up returns on capital (which largely benefit wealthy holders of capital).[5] Economist Larry Summers, former Treasury Secretary under President Clinton, co-authored a paper in 1981 that showed that the estate tax has severe impacts on the accumulation of privately held capital. Using Summers’ methodology, a July 2012 study by the Joint Economic Committee Republicans showed that since its inception, the estate tax has reduced the capital stock by approximately $1.1 trillion.[6]

The estate tax also encourages firms to structure as corporations instead of as family businesses, because corporations do not pay estate taxes when the person at the helm changes. Family businesses, however, can be subject to rates of over half the value of the estate when a deceased owner transfers the business to their heirs. This observation should be disconcerting to left-leaning voters, who recognize that smaller family businesses have ties to their communities. It should also concern right-leaning voters, who should see this as a distortion of the market process.

Perhaps the worst aspect of the estate tax is how uneven its impact is in practice. By utilizing careful estate planning, many wealthy taxpayers are able to shield much of their income from taxation upon their death. The people that tend to get hit the hardest are those that die unexpectedly, or, like farmers, have their assets tied up in illiquid holdings.[7] The estate planning industry has grown in size over the years as estate law becomes more complex. Three studies have even found that the compliance costs associated with the collection of the estate tax are actually higher than the amount of revenue the tax brings in.[8] Almost the entire estate planning industry can be thought of as economic waste, because it would not exist without the estate tax, and the high-skilled labor and capital utilized in that industry would be applied to other, more productive economic endeavors if the estate tax were repealed.

2011 and 2012 marked the first time in a decade that the estate tax rate and exemption level have been the same for more than one year. For 2010, the president and Congress (unintentionally) allowed the estate tax to expire completely, an outcome unexpected by most observers. While a repeat in 2013 may be desirable, exactly what happens remains to be seen.

Buckeye State Bucks Estate Tax

Ohio has succeeded in something that many in Indiana have been pushing toward for years (and it has nothing to do with a Big Ten football championship). The Buckeye State successfully repealed its state estate tax. The Washington, D.C.-based American Family Business Foundation recently issued a statement on the matter:

Ohio will become the first state since 2009 to repeal its state estate tax, which was one of the worst in the nation, taxing any family with more than $338,333 in assets. The repeal goes into effect on January 1, 2013, and is a part of Ohio’s FY 2012-2013 budget, which Governor John Kasich is expected to sign into law by the end of today.

The American Family Business Institute (AFBI), a national trade association of family business owners, farmers and entrepreneurs across the country, applauds Ohio’s Governor and the State House for passing repeal, which was included in Ohio’s 2012-2013 biennial budget and which goes into effect starting January 1, 2013.

AFBI’s President Dick Patten, who testified before both the Ohio House of Representatives and Ohio Senate in support of the legislation, said: “By repealing and not just ‘reforming’ their state estate tax, Ohio has set an example for the 21 other states and the District of Columbia that still impose these onerous taxes.”

Those remaining states with estate or inheritance taxes include: 
Connecticut – Estate Tax
Delaware – Estate Tax
Hawaii – Estate Tax
Illinois – Estate Tax
Indiana – Inheritance Tax
Iowa – Inheritance Tax
Kentucky – Inheritance Tax
Maine – Estate Tax
Maryland – Estate and Inheritance Tax
Massachusetts – Estate Tax
Minnesota – Estate Tax
 Nebraska – Inheritance Tax
New Jersey – Estate and Inheritance Tax
New York – Estate Tax
North Carolina – Estate Tax
Oregon – Estate Tax
Pennsylvania – Inheritance Tax
Rhode Island – Estate Tax
Tennessee – Inheritance Tax
Vermont – Estate Tax
Washington – Estate Tax
Washington, DC – Estate Tax

“Ohio’s estate tax repeal is emblematic of the larger trend towards repeal or positive reform of estate taxes that is occurring throughout the nation,” said Patten.

For example:

  • In Oregon, voters spoke out and legislators backed away from a proposal to turn the state inheritance tax into an estate tax with the highest rate in the nation.
  • In Maine, the Governor signed into law a proposal to double the estate tax exemption.
  • In North Carolina, the State Senate rejected the governor’s proposal to do away with the current exemption, which would have caused more Tarheel state residents to be hit with an even heavier death tax.
  • In Minnesota, the legislature has proposed quadrupling the estate tax exemption as part of the state budget.
  • On Capitol Hill, nearly 150 Members of Congress – both Republican and Democrat – have cosponsored the “Death Tax Repeal Permanency Act” (HR 1259), a bill that would permanently repeal the Federal Estate Tax.

Taxing Us to Death and Beyond

I thought this argument, forgive the pun, was dead and buried. The issue: an estate tax that penalizes business owners, investors and all survivors that must pay Uncle Sam for the success and monies earned by a person before they passed away.

The so-called death tax was part of the 2001 reform package that gradually reduced its impact. Elimination was scheduled for 2010 (although it was never made permanent and was ultimately scheduled to return a year later). But at a time when we should be looking at maintaining the elimination, the Obama administration and Congress are indicating a high priority in keeping the tax in place (with no removal in 2010).

Supporters of that plan say there will be little impact on the economy since they intend to keep the tax at its current level. Are they serious? Who do you want to have that money? The government or Americans who would be in position to increase private sector spending and investment.

The Small Business & Entrepreneurship Council outlines the case. Read it and, if this plays out as projected, weep.