To perhaps my everlasting shame, I watched the second televised debate between Donald Trump and Hillary Clinton. And the entire time, it seemed surreal to me that one of these truly unlikable people is going to be the next leader of the free world.
While we might dream that the Electoral College will somehow throw the rule book out the window and elect someone — anyone — else, one of these two will be the next president. And that means that we’re very likely to see some changes to the tax code.
Let’s take a look at the tax code changes proposed by both candidates and see what they might mean for ordinary investors.
I’m going strip out ideology and keep this pretty matter-of-fact. I’ll also ignore for now the potential impact on the budget deficit and national debt. Sadly, those are issues our children will be forced to deal with. For today, we’ll focus only on the immediate impact on our take-home pay. All data here comes from the respective candidates’ campaign websites.
Donald Trump’s Tax Plan
I’ll start with Donald Trump’s tax plan.
In a lot of ways, it looks like typical Republican orthodoxy of lower and simpler taxes, and Trump’s plan actually overlaps quite a bit with Republican proposals in the House of Representatives.
Trump would reduce the number of tax brackets to just three, down from the seven we have today. On income up to $75,000, American households would pay 12% in federal taxes. On income over $75,000 but less than $225,000, the rate bumps up to 25%. And on income over $225,000 the rate would be 33%. (Single taxpayers would be taxed at half those amounts.)
Trump would leave the capital gains tax unchanged and would eliminate the estate tax … but with a twist. Larger estates would not get the capital gains step-up. So while heirs would not have to pay taxes on the value of the assets inherited, they might be on the hook for capital gains.
Trump’s plan would also eliminate the carried interest provisions that allow hedge fund managers to pay lower capital gains rates rather than higher ordinary income rates. And he would lower the corporate tax rate to 15%.
Hillary Clinton’s Tax Plan
Hillary Clinton’s plan is also standard party orthodoxy for a Democrat. It is more focused on wealthier taxpayers paying a larger share and makes few specific comments about taxes paid by middle- and working-class taxpayers. She makes no specific mention of the basic tax brackets and would, presumably, leave them unchanged.
Hillary has four major planks:
- Implementing a 4% “Fair Share Surcharge” on taxpayers earning more than $5 million.
- Shutting down what she describes as a “private tax system” for the wealthy. Specifically, this would mean shutting down assorted loopholes. Interestingly, Clinton specifically targets the step-up in basis that eliminates capital gains for inherited assets — something Trump mentions as well.
- Returning the estate tax to 2009 levels. In 2009, estates larger than $3.5 million were subject to a 45% tax rate. Currently, estates over $5.45 million are subject to a tax of 40%.
- Ensuring that “millionaires can no longer pay a lower rate than their secretary” by ensuring a minimum tax rate of 30% on incomes over $1 million.
Clinton, like Trump, also singled out carried interest as something that had to be eliminated.
What’s the Difference?
Now, let’s pretend that either plan would be passed as is and that both would truly close the loopholes they claim to close without creating new loopholes. (I have serious doubts on that front, but humor me.) What is the practical effect for American investors?
For the vast majority of Americans, the regular income tax regime under either candidate would be about the same. Hillary’s plan maintains the status quo for all but the highest brackets. And Trump’s plan, according to the Tax Foundation, would reduce the average tax rate by a little less than 1%.
Americans with multimillion-dollar incomes will obviously fare better under a President Trump than a President Clinton. But the vast majority of Americans won’t really notice either way.
But on the estate tax, there are real differences. A lot of middle-class baby boomers will potentially get snagged in the Clinton plan, as $3.5 million is a relatively low threshold in this era or inflated home and stock prices. A two-income family maxing out their 401k plans could easily hit those levels at retirement.
Regardless of whichever candidate wins on Nov. 8, we all still have to go to work the next day. And most of us will still be paying taxes at about the same rates we are today.
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