• A Reflection of new U.S. Tax Proposals

    By E. Pete Lewis

    01-08-2016

    The U.S. is in the middle of a heated contest for the Presidency. Candidates Donald Trump and Hillary Clinton have published their tax proposals. But because there are many hot issues which are polarizing our voters, publicity about their proposals lags far behind gun control, immigration laws, abortion, healthcare and foreign policy, all of which are high value issues.

    Of course, being a tax guy that saddens me. But I am also a realist. Tax policies are not exactly sexy. They don't draw media attention. They aren't voter magnets. Let's face it. They only affect wages, jobs, investments and the cost of capital of a nation. And who cares about those things?

    But for a few "code heads" like me who still have tax passion, I'd like to layout the two tax proposals presented by our presidential candidates.

    Before we begin let's address the natural thing that most voters do. We pick winners or losers. So regarding tax policies we ask, which presidential candidate has the better proposal? Typically the answer to that question is often based on individual social and economic profiles.

    But what if we overlooked individual social-economic profiles and evaluated the two tax policies based on economic impact? Now ask the question, what makes a tax policy good or bad? Is a good policy one that provides more after-tax income? Or is a good tax policy one that increases federal revenue in spite of decreasing after-tax income? Maybe, a good tax policy should accomplish both ---- increase after-tax wages and help balance the federal budget?

    Consider this. A tax policy has no real value on a standalone basis. Tax contributions are only one component of a macroeconomic business cycle. Without supportive fiscal and monetary policies a tax policy cannot produce a healthy economy.

    This is not an evaluation of the two tax policies it is a presentation. I am not picking a winner or loser. That judgement is yours.

    U.S. TAX PROPOSALS

    I've read the tea leaves of two respected organizations which have analyzed the new tax proposals. (See reference to: The Tax Policy Center and the Tax Foundation).

    I've selected the ten year outlook from the Tax Foundation. The Foundation reviewed the tax policies of Donald Trump and Hillary Clinton based on static and dynamic assumptions. The data was then rolled-up into Tax and Growth Models. The Trump policy was analyzed in September of 2015 and Clinton in January of 2016.

    Trump Tax Plan

    The Trump policy offers relief to the middle class. The policy will create higher wages, less taxes and more jobs, according to the Tax Foundation. The Trump plan will accomplish this by cutting taxes. On a static basis taxpayers will see an $11.98 trillion tax decrease over ten years and on a dynamic basis a $10.14 trillion decrease. See the Table below.

    Ten Year Revenue (in $Billions) Impact of Donald Trump's Tax Reform Proposal (2015 - 2024)
    Tax Static Revenue Impact Dynamic Revenue Impact
    Individual Income Tax -$10,201 -$9,535
    Payroll Tax $0 $839
    Corporate Income Taxes -$1,541 -$1,371
    Excise Taxes $0 $69
    Estate and Gift Taxes -$238 -$238
    Other Revenue Sources $0 $101
    Total -$11,980 -$10,135

    The Trump policy is purported to generate an 11 percent higher GDP, 6.5 percent higher wages and 5.3 million more full-time equivalent jobs in the U.S. In spite of the lost federal revenue the forecasted larger economy may "increase wages which would narrow the revenue lost through individual income tax by about $666 billion and increase payroll tax revenues by $839 billion with the remainder of the recouped revenue coming from other taxes..." according to the Tax Foundation.

    This plan is to provide tax reform incentives to those who work and invest. These incentives are expected to lower the top marginal tax rate on individuals from 39.6% to 25%; while business tax rates will be reduced from 35% to 15%. Lower bracket taxpayers will see increases in after-tax adjusted gross income (AGI) ranging between 0.6 percent and 1.4 percent. After-tax AGI of middle income taxpayers will increase between 3 to 8.3 percent and the top one percent of all taxpayers will experience a 21.6 percent after-tax AGI.

    The new incentives will then boost GDP by 11 percent. And a hike in GDP is expected to drive higher wages (6.5%) and infuse the labor force with 5.3 million additional workers.

    REFLECTIONS

    • The tax plan may create a net $10 trillion budget deficit over time.
    • The plan does identify spending cuts which may be required to finance the tax cuts.
    • The plan does not account for any fiscal or economic effects of interest on debt.
    • The proposed lower corporate tax rates in the U.S. may spark profit shifting by U.S corporations currently located abroad. If so, this will diminish the effects of the 20% corporate rate differential.

    Clinton Tax Plan

    The Clinton plan increases taxes and places a burden on the country's highest earners. It is expected to decrease after-tax income by at least 0 .9 percent, reduce the size of the GDP by one percent over the long term; generate 0.8 percent lower wages and 311,000 fewer full-time equivalent jobs.

    On a dynamic basis this plan represents an average 1.3 percent reduction in after-tax incomes. The top ten percent of taxpayers will see a 1.7 percent after-tax income reduction and the top one percent a 2.7 percent reduction.

    The tax increases are expected to increase the federal revenues. On a static bases the Clinton plan increases federal revenue by $498 billion over the next 10 years. On a dynamic basis the Foundation forecasts $191 billion.

    The plan also kills the current tax favored long term capital gains rate of 20 percent on investments held for more than one year. The proposed rate is 39.6 percent on investments held between one and two years, then it drops to 36 percent over the next two to three years and another drop of four percent each year for the next three years until the rate reaches 20 percent in year six. The revised schedule may encourage taxpayers to defer capital gains. The estimated loss of revenue is calculated to be $374 billion on a static basis and $409 billion on a dynamic basis.

    The greatest source of federal revenue comes from the "Buffett Rule". The "Buffett Rule" proposed by billionaire investor Warren Buffett places a twenty-eight percent cap on itemized deductions, four percent surtax on incomes over $5 million and a thirty percent minimum tax on millionaires.

    Below is a table prepared by the Tax Foundation which identifies the Clinton revenue and economic impact of Proposals based on static and dynamic outlooks.

    Ten Year Revenue (in $Billion) and Economic Impact of Hillary Clinton's Tax Proposal (2016-2025)
    Proposals 10 Year Static Revenue Impact 10 year Dynamic Revenue Impact
    "Buffett Rule" $321 $209
    4 Percent Surtax $141 $95
    Restore Estate Tax to 2009 Levels $106 $76
    Eliminate Deduction for Reinsurance Premiums Paid to Businesses $11 $2
    Cap the Tax Revenue of Itemized Deductions at 28% $293 $218
    Adjusts the Schedule for Long term Capital Gains -$374 -$409
    Total $498 $191

    RELECTION

    • It should not be assumed that the increase in federal revenue will lead to a balanced federal budget.
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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

E. Pete Lewis

E. Pete Lewis is an Adjunct Professor and Chairperson of Accounting and Finance for the DePaul University, School of New Learning, University of Phoenix-on ground, School of Business and Aurora University in the City of Chicago, Illinois USA. Mr. Lewis holds an MBA in finance and is a Certified Public Accountant and Enrolled Agent Admitted to Practice Before the IRS.

Mr. Lewis has more than 35 years of tax planning experience working in public accounting, legal and corporate environments. He is a Tax Consultant and principal in Lewis & Associates Tax Planning, Inc., a U.S. based tax planning firm. His firm concentrates on IRS debt resolution and tax minimization strategies for small and medium sized U.S. based companies.

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