This year’s presidential race may be wildly different from past races, but one of the verities of our era still holds: Republicans want to cut taxes and Democrats to raise them. On this issue, Hillary Clinton and Donald Trump are running as mainstream representatives of their parties. The public should hope that Congress exercises a restraining influence on either one of them.
Clinton would raise taxes on high earners in a variety of ways. People who make more than $5 million would pay a new 4 percent “surcharge.” The value of several tax deductions, such as the one for mortgage interest, would be limited for people in the top three tax brackets (including married couples making more than $230,000 a year). Capital-gains taxes would rise for investments held between two and five years, with higher rates on the shorter-term ones. Clinton would introduce a new set of tax rates on large estates that would reach 65 percent at the top, compared with the current 40.
While Clinton’s plan is a net tax increase, it would also cut tax bills for many people. Most parents of children younger than five would see their child tax credit, now $1,000, double in size. Some low-income families would be newly eligible for it. (Some of them already have negative tax liabilities and would come out further ahead under the proposal.) A new tax credit could be applied against out-of-pocket health expenses: That’s Clinton’s way of responding to popular unhappiness with the rising deductibles and co-pays that have accompanied Obamacare.
Businesses, too, would see a mix of tax increases and cuts. Clinton would allow small businesses to write off the cost of their investments immediately instead of over several years. But she says the federal government will raise $275 billion over ten years by reforming business taxes in some unspecified way.
Trump’s plan, by contrast, cuts taxes on the highest earners. The top income-tax rate would fall from 43.4 to 33 percent. The estate tax would vanish. The standard deduction would more than double. Most people would be eligible for a new deduction for child-care expenses capped at the average cost of those expenses in each state — and Trump has said that stay-at-home mothers would receive the full value of that deduction. (His website is unclear on that point.)
The corporate-income tax, now 35 percent, would fall to 15 percent under Trump’s plan. Our corporate tax rate would thus move in one step from the highest in the developed world to one of the lowest. Manufacturers would get a new tax-reducing option: They could write off the cost of their investments immediately or deduct their interest expenses. How the many businesses that pay taxes under the individual income-tax code would be treated is something of a mystery, with different think tanks reaching varying conclusions from the campaign’s contradictory comments.
Trump would, however, raise some tax rates. The bottom tax bracket would pay a 12 percent rate instead of 10. Some affluent single people — those making between $110,000 and $190,000 a year — would pay 33 percent instead of 28 percent. The personal and dependent exemptions would disappear.
Overall, it is a very large tax cut. The Tax Foundation produced several estimates of the effect Trump’s plan would have on federal revenues. If all businesses get to pay the 15 percent tax rate and the tax cuts boost the economy in the way the foundation’s model predicts, the Trumpified tax code would yield $3.9 trillion less than the current tax code is projected to yield over the next ten years.
That is, however, an optimistic take. Many of Trump’s tax cuts, and in particular his reduction in corporate tax rates, could be expected to raise economic growth. But the Tax Foundation assumes both that cutting taxes on investment will have much stronger positive effects than many other economists expect and that increased debt will not reduce economic growth. Without any added economic growth, the total revenue hit would be $5.9 trillion. Or even more: The foundation assumes that a Trump administration would save money by letting stay-at-home mothers deduct only a fraction of their states’ average child-care costs, contrary to what Trump has said. It also ignores the extra interest the government would have to pay if it went further into debt.
This large reduction in revenues would take place at a time when we are already running large deficits. The Congressional Budget Office expects the government to run a $590 billion deficit this year, and another $594 billion one next year. Entitlement spending is growing fast thanks to the retirement of Baby Boomers, and Trump has opposed reductions in that spending. Under these circumstances, cutting taxes this much would be reckless.
As large a net cut as it is, though, Trump’s plan would raise taxes on many people. New York University law professor Lily Batchelder points out that the elimination of the dependent exemption would leave a lot of people with low and moderate incomes paying higher taxes. Representatives of the Trump campaign have said that while a small number of people might fall into this category, a Trump administration would work with Congress to prevent them from seeing higher taxes. But Batchelder’s analysis suggests that 40 million people would be affected, and shielding them from higher taxes would require either making the deficit even larger or reneging on some of the tax-cut promises Trump is making.
Clinton’s plan has a different problem: It would reduce incentives to work, save, and invest. That’s why the Tax Foundation — which, recall, assumes that tax rates have a strong effect on investment — estimates that the economy ten years from now would be 2.6 percent smaller with her plan than without it.
Clinton’s deliberate attempts to change behavior, meanwhile, are unlikely to be effective. She would complicate capital-gains taxes to encourage shareholders and therefore companies to look more to the long term. But most corporate stock is not held by taxable investors: Pensions, for example, would not have any additional reason to be long-term-oriented.
Health-policy analyst Chris Jacobs points out that the new tax credit for out-of-pocket health expenses could spur companies to pare back their health benefits. They could raise deductibles, for example, knowing that the federal government would pick up part of the tab.
The good news about both candidates’ plans is that Congress might exercise a salutary influence on them. Yes, really. Even a Republican Congress might balk at actually passing a tax cut as large as the one Trump is suggesting. George W. Bush had to scale back his tax cut to get it through a narrowly Republican Senate, and his was smaller than Trump’s from the start.
If Republicans keep the House, let alone the Senate, Clinton’s tax increases are doomed. No Republican-controlled chamber of Congress has passed a tax increase in more than three decades. (The tax increases that took place at the start of President Obama’s second term happened automatically, because Bush’s tax cuts expired. The Republican House passed a bill extending some but not all of the tax cuts.) Every Republican senator but one voted in 2015 to repeal the estate tax, and one Democrat joined them. They’re not going to vote to raise it.
But a Republican House in 2017 is not assured. If an anti-Trump landslide wipes away the Republican majority, taxes are going up.