Good morning Hank, it's Tuesday.
So in Sunday's US presidential debate, a voter asked:
"What specific tax provisions will you change to ensure the wealthiest Americans pay their fair share in taxes?"
The candidates' answers were interesting, but limited.
So today I thought I'd take a look at Hillary Clinton and Donald Trump's tax plans.
But to do that, we need to understand the current US tax system, which unfortunately is not uncomplicated.
So let's imagine three married couples with two children a piece.
The Johnsons make the median household income of $52,000 per year.
The Kennedys make $300,000 per year and the Roosevelts make a million dollars a year.
Definition time. So your top marginal tax rate is the tax rate you pay on you last dollar of income.
For the Kennedys that's 33%.
But that's not actually the percentage of their income that goes to federal income taxes
because no matter how much money you make your first $18,450 of income
is taxed at 10%, the next 56ish thousand dollars is taxed at 15%
and so on
In the end, the Kennedys pay about $66,424 in federal income taxes under the current system
that's 22% of their income, that's their effective tax rate.
The Roosevelts, with their million dollars of income
pay about $336,500 in federal taxes
an effective tax rate of 33.6%
or .7 if you want to round up.
But God knows it can't be that simple
because usually families like the Kennedys and the Roosevelts pay less in taxes
due to deductions.
The U.S tax code allows you to deduct certain expenses from your income
like charitable donations, some retirement savings and mortgage interest
and you could either itemize your deductions by listing them
or take the so called standard deduction which is available to all taxpayers
for married couples filing jointly, it's currently $12,600
Ok, I know this is a little bit complicated but stay with me
lastly we have the Johnsons, with their income of $52,000 a year
the Johnson's can expect to pay $553 in federal income tax
an effective tax rate of just over 1%
Wait, what?
Right, so first the Johnsons take the standard deduction of $12,400 ($12,600)
which brings their taxable income down to $39,600 (39,400)
you also take a $4,050 personal exemption
for yourself, your spouse and your two kids. Thats $16,200
which brings the family's taxable income down to $23,200
they would pay about $2,553 of taxes on that income
EXCEPT, for child tax credits
there is 1,000 dollar tax credit for each dependent child you have
so thats how the Johnsons get down to $553
and I think this is really important to understand
because it underscores that for the half of American families making less than $52,000 a year
federal income taxes are quite low
in fact, a large majority of those households pay no federal income tax at all
they do pay lots of other taxes though
like payroll taxes, which neither candidate is proposing to change
and sales and property taxes which are local and therefore not under the purview of the president
but its really critical to remember that federal income tax policy can only do so much
Ok, so we're going to look at both these proposals mostly using analysis from the Tax Foundation,
which, for the record, is non-partisan but usually considered conservative leaning
let's start with Hillary Clinton's tax plan, which she described like this
"Nobody who makes less than $250,000 a year, and that's the vast majority of Americans as you know"
"will have their taxes raised"
"because I think we've got to go where the money is"
and thats accurate Clinton's plan mostly leaves the tax code unchanged
with four main differences
First, income over 5 million dollars per year which is currently taxed at 39.6%
would be taxed at 43.6%
there's a lower tax rate on capital gains
which is like sale of appreciated stock or of a business
and on capital gains over 5 million dollars, Clinton's tax plan would also increase that rate 4 %
from 20 to 24 %
Secondly households with over a million dollars in income
would have to pay at least a 30% effective tax rate
so basically they couldn't use deductions to get under a 30% tax rate
Third carried interest would be taxed like regular income
this is a little bit complicated
but basically carried interest allows many investment bankers
to claim most of their income as capital gains rather than as ordinary income
which means they pay lower tax rate
this would close this so called loophole
and lastly Clinton's plan would double the child tax credit
and also introduce a new $1,200 tax credit for caregivers
so if you're taking care of an elderly or disabled family member that credit would be available to you
there would also be some changes to the estate tax
and some corporate taxes would change in an attempt
to keep U.S companies from shielding their income from U.S taxes
so under the Clinton tax proposal neither the Kennedys nor the Roosevelts would see their taxes change
unless the Roosevelts are claiming hundreds of thousands of dollars in deductions
in which case their taxes might go up slightly
the Johnson's however would see their federal income tax rate go from
$553 a year to 0 because of the increase in the child tax credit
so just to be clear, at the debate when Donald Trump said
"She is raising everybody's taxes massively"
that's just not true for the vast majority of Americans
but there is a cost to tax increases even when they're only focused on the rich
they discourage investment and business spending
like the Tax Foundation says that the Clinton plan
would reduce overall U.S economic output by 1% over the long term
other projections have it much lower
but regardless it would have some effect
it would also of course create new government revenue
which would be used to pay for subsidized college,
infrastructure projects and paid family leave
most non-partisan analyses conclude that after accounting for all of this
the Clinton tax and budget proposal would add about $200 billion to the U.S debt over the next 10 years
Ok, lets talk about Donald Trump's new tax plan
which is quite different from the one he released in June and which I talked about here
at the debate he said "We're cutting taxes for the middle class"
"and I will tell you we are cutting them big league for the middle class"
so Trump's plan features three marginal tax brackets
for married couples filing jointly income up to $75,000 dollars a year would be taxed at 12%
from there up to $225,000 would be taxed at 25%
and above $225,000 would be taxed at 33%
he would also cap deductibles for married couples at $200,000 a year
he would make child care expenses deductible up to the average cost of childcare in your state
increase the standard deduction from $12,600 per year for married couples filing jointly
to $30,000 a year and he would get rid of personal exemptions
as you'll recall, those personal exemptions allow you to take $4,050 off your income
for each member of your family
eliminating them, even with the increase in the standard deduction
would mean that for many families with single parents of with more than three children
making between 60-100,000 dollars a year
taxes would actually go up somewhat under Trump's plan
this would be the case for about 7.8 million households
but for the rest of us our federal income taxes would stay about the same or go down under Trump's plan
like if we look at our three hypothetical families
the Johnsons would see their federal income taxes go from $553 a year to $400
the Kennedys, making $300,000 a year, would pay about $46,350 in taxes
a reduction of about $20,000 from the current system
and the Roosevelt's would pay about $287,250
as you can see the tax cuts are heavily concentrated on the wealthiest individuals
who pay the most income tax
Trump's plan would also decrease the corporate tax rate from 35% to 15%
and like Clinton's plan it would seek to get back some of the profits that are offshore from U.S companies
and it would close the carried interest loophole
in total, before accounting for macroeconomic effects
Trump's plan would lower revenue somewhere between 4.4 and 7.2 trillion dollars over the next 10 years
depending on who's doing the math
but, just as higher taxes can discourage investment
lower taxes can encourage it
and the Tax Foundation does project that Trump's plan would lead to growth
but no matter what you've heard that does not mean that tax cuts pay for themselves
They don't
for instance both the Reagan and the Bush tax cuts boosted growth
but they lowered federal revenues
the Tax Foundation, which remember, is conservative leaning
says that even after growth is accounted for, federal revenues will decrease under Trump's plan
between 2.6 and 3.9 trillion dollars
now Trump has proposed to pay for some of the shortfall, around 1 trillion dollars over 10 years
via budget cuts
but he also wants to spend 500 billion dollars more on the military over the next 10 years
so even the rosiest projections have Trump's total budget and tax plan adding about 2 trillion dollars
to the national debt over the next 10 years
that's 10 times greater than under Clinton's plan
and other projections like those made by the Tax Policy Center have that number at 7.2 trillion dollars
36 times greater than Clinton's plan
I want to pause for a second to discuss why this could be such a huge problem
so currently the U.S.'s debt held by the public is about 77% of our total annual economic output
that's high but its not so high that people are worried about our ability to pay it back
we know that because interest rates on Treasury bills are near 0
it's basically seen as a guarantee that the United Sates will pay its debt
but if our publicly held debt to GDP ratio gets higher
traditionally when it gets to 100% or 110%, that might change
lenders might start to get nervous and think maybe the U.S can't pay its debts
which would make loans to the United States government riskier
which would make them more expensive
interest rates would go up to pay for the more expensive loans
the government would have to increase taxes or decrease spending
which would inhibit growth, which would lead to lower tax revenues
that would necessitate taking out more loans
with higher and higher interest rates
which would leave less money for programs like Social Security and unemployment insurance
which would further inhibit growth, which would lower government revenues
and pretty soon Greece
this is called a debt spiral and it is a catastrophe that once it starts is very difficult to stop
it often takes decades to unwind
now the chances of a debt spiral in the United States are very low no matter who becomes president
but the Non-Partisan Committee for a Responsible Federal Budget
has the 10-year debt from Trump's tax plan rising to 105% of GDP
and that is a very scary level
now I want to emphasize that there are serious and thoughtful republican tax and budget plans out there
but to cut taxes by the amount that Trump is proposing
it is necessary to cut either popular entitlement programs like Medicare
or else to cut defense spending dramatically
Serious republican budget proposals do one or both
and Trump's does neither
so in summary Donald Trump's tax plan would cut income taxes for most Americans
with the majority of the benefits going to the wealthiest households
and small increases on taxes for some middle class families
Hillary Clinton's tax proposals would cut income taxes for middle class families with children
the rest of us probably wouldn't see much change
but the wealthiest American households would have their taxes go up
if you'd like much more information
there are links to non-partisan analyses in the dooblydoo below
I'll also try to be in comments to answer any of your questions
and if you aren't yet registered to vote, or aren't sure if you are registered
please go to youtube.com/howtovoteineverystate
and find your state
in many states the registration deadline is today
so register. Please vote!
Hank, DFTBA. I will see you on Friday.