In just a few short hours, Hillary Clinton and Donald Trump are set to square off in the first presidential debate of the 2016 campaign, in an event that is sure to be remembered for the mutual admiration and respect the candidates show one another.
That’s ridiculous, of course: the gloves are sure to come off tonight, and nothing will be off limits, from Clinton’s emails and marriage to Trump’s bankruptcies and healthy orange glow.
What we won’t get enough of, however, is tax talk, largely owing to the fact that the general population is much more concerned about:
- Whether we’ll be able to continue to stockpile lethal arsenals in our crawlspace, and
- How we can keep everyone that is not a member of our immediate family from entering the country.
With vital issues such as those at stake, who’s got time to discuss corporate inversions and capital gains rates?
But while it may not drive ratings, tax policy deserves its time in the spotlight this evening. Through an unfortunate turn of events, however, I will not be able to moderate tonight’s debate, with that unfortunate turn of events being that no one has asked me to moderate the debate. But if they had, you could be damn sure that aside from being the most disapproving, condescending moderator since the principal in Billy Madison, I’d get to the bottom of these ten tax questions that must be answered:
Mr. Trump: About those tax returns…will we be seeing those anytime soon?
While there is no law requiring a presidential candidate to release his or her tax returns for public inspection and ridicule, it has become regular practice, and subsequently an expectation of the voting public, since the early 1970s. While a tax return is undeniably private information, it can tell us much about a candidate, including his or her sources of income, propensity for philanthropy, and effective tax rate.
As of today, however, Trump has refused to fall in line, alternatively insisting he cannot release his return because he is 1. under “continuous audit,” or 2. “no one cares about the return except the media.” That of course, is ridiculous; people care, even if for most people, Trump’s return would be as decipherable as Chinese arithmetic. In fact, it certainly appears that Trump cared four years ago, as illustrated by this poignant tweet about then-Republican candidate Mitt Romney:
The fact is, we deserve to see Trump’s return. After all, he has built his campaign on the notion that he is a “winner,” and many of his supporters herald his business acumen. But what if his returns paint a drastically different picture? Many have speculated that Trump has been resistant to release his returns because the magnitude of the numbers and complexity of his holdings will invite the same scrutiny Romney endured, but isn’t the much greater threat to Trump the possibility that those returns show…not much of anything?
Ms. Clinton: The one thing both parties can agree upon with regard to tax policy is that the Code needs to be simplified. Yet you are proposing adding another ordinary income tax rate, five(!) new rates on capital gains, and a second alternative minimum tax calculation. You do realize this is the opposite of simplicity, right?
Under current law, income is taxed at progressively increasing rates. Ordinary income — things like wages and interest — is potentially subject to seven rates: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Clinton would add an eighth bracket, for taxpayers with income in excess of $5 million, of 43.6%.
In addition, Clinton would not only raise the top rate on capital gains — which currently stands at 20% before considering the net investment income tax of 3.8% — to 24% for those same taxpayers with income greater than $5 million. Clinton would then make those taxpayers earn that 24% rate by holding a capital assets for six years prior to sale: for each year the asset is held, the rate would drop, like so:
- less than 2 years: 43.6%
- > 2 years: 40%
- > 3 years: 36%
- > 4 years: 32%
- > 5 years: 28%
- > 6 years: 24%
Lastly, Clinton would require that any taxpayer with income in excess of $2 million pay an effective tax rate of 30%. This rule — coined the “Buffet Rule” because Warren Buffet once famously claimed that he pays a lower rate than his secretary — would require a second alternative tax calculation be performed for the taxpayer.
As you can see, these changes would layer considerable additional complexity on an tax Code that is already a tangle of cross-references, exceptions to exceptions, limitations and thresholds. And while these changes are all targeted at the wealthiest 1% of taxpayers — who can surely afford and likely employ a sophisticated tax preparer — the fact remains that by adding this much additional complexity, even the brightest paid preparers will be forced to review the output of their computer system, shrug their shoulders and say, “eh…looks good to me.”
Mr. Trump: You previously promised that all business owners would pay tax at a maximum rate of 15% on business income. Your updated plan released last week, however, seemed to indicate that you’d abandoned this plan. Which is it?
Under current law, if a taxpayer earns self-employment income from a business — or if business income is earned by the taxpayer through an S corporation or partnership — the income is taxed on the individual’s return, subject to individual rates rising as high as 39.6%. Trump, however, has proposed reducing the corporate rate from 35% to 15%, and in an earlier version of his plan, stated that this 15% rate would apply to all business income, including any income earned by a self-employed individual, S corporation shareholder or a partner in a partnership.
This proposal immediately set off alarm bells in the tax community by promising to offer one of the greatest tax shelters of our lifetime: after all, why would anyone want to be an employee — and pay tax on their wages of up to 33% under Trump’s plan — when they could instead become an independent contractor and be guaranteed a top rate on their “business income” of 15%?
When Trump released his updated plan last week, it seemed to indicate that he had abandoned this plan, and that only corporations would be entitled to the 15% rate. Since that time, no one has been able to get a clear answer from the Trump campaign as to whether the proposal has been tossed; in fact, the Tax Foundation was so confused by the responses that it was forced to score the latest Trump plan two ways: once with the business tax cut in, once without. The resulting difference amounted to $1.5 trillion in tax revenue over 10 years, reflecting the magnitude of a provision that no one, Trump included, seems willing or able to confirm exists.
Ms. Clinton: Do you intend to do anything about the corporate tax rate?
During his eight-year run as President, Barack Obama and his Republican counterparts haven’t agreed on much when it comes to tax policy, but they have agreed that the current corporate tax rate of 35% needs to come down. While most Republicans favor a rate of 25%, in his past few budgets President Obama has pitched a top corporate rate of 28%, while allowing a 25% rate for manufacturers.
To date, however, Clinton hasn’t stated her position on or proposal for the corporate tax rate. Would she leverage off the Obama budget? Or is she content with a 35% rate?
Mr. Trump: So are you going after the two sacred cows — mortgage interest and charitable contributions — or not?
Donald Trump has embraced his role as a “political outsider,” unbeholden to the constraints, promises, and quid pro quos of a career politician. But in at least one way, he’s shown his political savvy: in his initial proposal, he promised to “limit the benefit of itemized deductions,” but to preserve full deductions for mortgage interest and charitable contributions.
This, of course, is necessary because if you threaten to remove or limit deductions for home ownership or philanthropy, you risk career-ending backlash from the powerful real estate and tax-exempt lobbies. This is precisely why every candidate — regardless of political party and not named Ben Carson — promises to preserve these two deductions.
In his latest plan, however, Trump states that he will simply limit itemized deductions to $200,000 for married taxpayers and $100,000 for single taxpayers, with no special exception from the cap afforded mortgage interest or charitable contributions. Is Trump taking aim at the sacred cows, or has he just neglected to add detail to his proposal?
Both Ms. Clinton and Mr. Trump: Will either of you do anything about the bizarre tax treatment currently levied on perfectly legal marijuana facilities?
Marijuana is now legal in many states for medicinal purposes, and in a few, including my home state of Colorado, for recreational purposes. Marijuana remains, however, firmly entrenched within Schedule 2 of the Controlled Substance list, making the drug illegal for federal purposes. As a result, these perfectly legal — from a state perspective — marijuana facilities face draconian tax treatment: by virtue of Code Section 280E, they are not entitled to deduct ANY of their expenses — aside from the cost of marijuana grown or purchased for resale. This is because that provision prohibits a business from deducting expenses “attributable to trafficking in a controlled substance.”
Courtesy of Section 280E, these facilities are required to pay tax on 100% of their net revenue, which for any other industry on the planet, would likely serve as its death knell; selling weed is so lucrative, however, that to date these shops have been able to survive.
And it’s not as if Section 280E is one of those provisions that’s buried in the law but that the IRS doesn’t enforce; to the contrary, the Service can, does, and will continue to apply Section 280E at every turn. In Colorado, the state has attempted to alleviate the pain by allowing deductions for G&A expenses on the facility’s state income tax return, but unless one of these candidates is willing to remove marijuana from Schedule 2 of the Controlled Substance List or amend Section 280E, medical and recreational marijuana facilities will continue to suffer at the hands of conflicting federal and state legal authority.
Mr. Trump: How exactly do you intend to pay for your tax cuts?
Give Trump credit for this: when his original tax plan was revealed to cost $11 trillion over ten years, he went back to the drawing board and revamped the proposal.
He had originally intended to reduce the current seven-rate system to four: 0%, 10%, 20% and 25%. Dropping the top rate nearly 15% — from 39.6% to 255 – proved too costly, however, so in his latest plan, Trump would adopt three rates: 12%, 25% and 33%, with the top rate kicking in at income in excess of $225,000 (if married, $112,500 if single).
Even with those changes, however, the most recent study by the Tax Foundation indicates that Trump’s tax cuts would the U.S. $6 trillion in tax revenue over the next decade if he preserves his 15% business rate proposal, and $4.5 trillion should he abandon it. Even when taking into account dynamic scoring — which anticipates that when taxes are cut, additional tax revenue will actually be collected due to economic growth, expanding businesses and increased wages — the Trump plan would reduce revenue by $4 trillion if the business cut is retained, and $2.6 trillion if it’s abandoned.
As you may have noticed, the country currently has a bit of a spending problem, and as a result, is deep in debt. If we forego $4 trillion in tax revenue over the next decade, how are we making up that shortfall? Where is the spending cut?
Ms. Clinton: With all due respect, have you gone cuckoo-bananas with your latest estate tax plan?
Under current law, if you die owning assets with a value in excess of $5.45 million, you pay tax of 40% on the value in excess of that threshold. Until last week, Clinton had long proposed dropping that exemption to $3.5 million and increasing the estate tax rate to 45%. On Thursday, however, Clinton took a page from the Bernie Sanders Wealth Redistribution Playbook, promising to further increase the rate to 50% on estates valued in excess of $1o million, 55% on estates worth more than $50 million, and an incredible 65% on estates valued in excess of $1 billion.
In an election where Clinton’s best chance of victory may come from stealing votes from “Never Trump” Republicans, she may well have ostracized those same voters with her latest estate tax pitch. And when you consider that the proposal won’t actually generate much in the way of taxes — about $800 billion over ten years, due largely to the fact that the number of estates in excess of $50 million each year typically number only in the hundreds – it seems a risky approach designed more as a “I’m willing to take on the super rich” talking point than an actual revenue raiser.
Mr. Trump: How do you respond to reports that your tax changes will actually increase taxes on single parents and low-income families?
Originally, Trump promised an expansive 0% bracket that would “remove 70 million people form the tax rolls.’ When faced with the bill for such promises, however, Trump, as discussed above, redesigned the plan, exchanging the 0% bracket for a 12% bottom bracket. And while he promises to increase the standard deduction from $12,600 to $30,000 (for married, $15,000 for single), he would also completely do away with personal exemptions, which currently amount to $4,050 per member of the household.
As a result, while the standard deduction has more than doubled, taxpayers with multiple children have lost over $16,000 in personal exemptions while also seeing their tax rate rise from 10% under current law to 12% under Trump. In addition, the head of household filing status would be eliminated under the Trump plan.
And while Trump promises to add three new child incentives to the Code — a deductible $2,000 contribution to a savings plan, an above-the-line deduction from adjusted gross income for child care expenses, and a refundable credit of up to $1,200 for low-income taxpayers — a recent study by Lily Batchelder at NYU reveals that even with these incentives, the combination of changes in Trump’s proposal would cause nearly 7.8 million families with minor children to experience an increase in their tax bills.
While the Trump campaign has called Batchelder’s report “fatally flawed” in a flurry of tweets, she has thoughtful responses to each criticism that can be found on her SSRN feed. In any event, the possibility of increased taxes on low-income taxpayers warrants a question in tonight’s debate.
Ms: Clinton: When it comes to taxing the rich, when is enough enough?
Clinton intends to raise $1.5 trillion in tax revenue over the next ten years, with nearly every penny coming from the richest 1%. The top rate on ordinary income would jump from 39.6% to 43.6%. The top rate on capital gains would jump from 20% to 43.6%(!). The Obamacare 3.8% net investment income tax would be retained. The Buffet rule would be added. The estate tax would jump to 65% in some cases. Itemized deductions would only offset income at a 28% rate.
Convincing arguments can be made both ways: that the rich should pay more of the total tax burden, or that soaking innovators and business leaders only hurts the economy and limits the trickle down of wealth to middle and lower income taxpayers. Take whichever position you embrace and go with it; I’m not here to tell you you’re wrong.
What I am curious about, however, is where it stops. Clinton’s proposals far outreach even the aggressive plans posited by President Obama; as mentioned above, they are beginning to resemble Sanders’ ideology far more than anything in the current presidential budget. In a time when the country is as divided as ever between the haves and the have nots, taking on the rich makes for good campaign fodder when the have nots comprise 99% of voters. But is it sound tax policy?
Hopefully, between charges of infidelity, failed business dealing, lying to the FBI, and thinly-veiled racism, we’ll get one or two of these questions addressed tonight. But I wouldn’t count on it.