The soap opera of the 58th quadrennial U.S. presidential election is nearing an end (I hope), and on November 8th we will be casting our votes for the next commander and chief. Though this election cycle has been somewhat entertaining, I’ll spare adding to the drama and try to add a little substance to your dinnertime conversations.
Tax reform has always been a major issue in this country. One can easily suggest that it was one of the many catalysts that led to the creation of the United States. Back in 1773, the British decided to give some favorable tax treatments to the East India Company (a financially troubled British-owned company) that were deemed unfair by many of the American colonists. A protest ensued, and the Boston Harbor got a little tastier via the Boston Tea Party.
The U.S. federal government collects taxes to finance countless services and programs. Take a look at last year’s federal budget. In 2015, 24% of the budget paid for Social Security Benefits – equating to $888 billion dollars1. Where did the majority of that money come from? Take a look at your paycheck. Have you seen a deduction on your paycheck labeled FICA? FICA stands for Federal Insurance Contribution Act – and that my friend, is you being taxed to pay for social security.
All right, enough about history and the boring stuff. Here are SOME of the proposed changes2 that the Democrat and Republican nominees (my apologies to the Independent and Green Parties) would like to see when it comes down to tax reform:
Income Tax: Rates on Ordinary Income
Clinton: Increase from 7 to 8 tax brackets by adding a 4% surtax on incomes over $5 million
Tax Brackets Under Hillary Clinton’s Tax Plan
| Ordinary Income | Single Filers | Married Filers | Head of Household |
|---|---|---|---|
| 10% | $0 to $9,275 | $0 to $18,550 | $0 to $13,250 |
| 15% | $9,275 to $37,650 | $18,550 to $75,300 | $13,250 to $50,400 |
| 25% | $37,650 to $91,150 | $75,300 to $151,900 | $50,400 to $130,150 |
| 28% | $91,150 to $190,150 | $151,900 to $231,450 | $130,150 to $210,800 |
| 33% | $190,150 to $413,350 | $231,450 to $413,350 | $210,800 to $413,350 |
| 35% | $413,350 to $415,050 | $413,350 to $466,950 | $413,350 to $441,000 |
| 39.6% | $415,050 to $5 million | $466,950 to $5 million | $441,000 to $5 million |
| 43.6% | $5 million and above | $5 million and above | $5 million and above |
Trump: Reduce from 7 to 4 tax brackets, with rates of 0%, 10%, 20% and 25%. The top rate applies to income over $150,000 for single filers and $300,000 for joint filers however, on August 8th, Trump modified his reform to support House Speaker Paul Ryan’s tax proposal which called for individual tax rates of 12%, 25% and 33% and that pass-through income (businesses that pay their taxes through individual income tax codes rather than corporate tax codes) would be taxed at 15%. 3, 4
Tax Brackets Under Donald Trump’s Tax Plan from September 2015
| Ordinary Income | Single Filers | Married Filers | Head of Household |
|---|---|---|---|
| 0% | $0 to $25,000 | $0 to $50,000 | $0 to $37,500 |
| 10% | $25,000 to $50,000 | $50,000 to $100,000 | $37,500 to $75,000 |
| 20% | $50,000 to $150,000 | $100,000 to $300,000 | $75,000 to $225,000 |
| 25% | $150,000 and above | $300,000 and above | $225,000 and above |
Income Tax: Rates on Capital Gains and Dividends
Clinton: Add a 4% surtax on income over $5 million. Raise rates on medium-term capital gains (investments held for less than six years) to between 24% and 39.6%.
Trump: Eliminate the net investment income surtax5 (net investment income surtax applies at a rate of 3.8% for tax filings at a specific amount, i.e. married filing jointly earning above $250,000).
Estate Tax:
Clinton: Increase the top estate tax rate to 45%, and lower the estate tax exclusion to $3.5 million (effectively $7 million per married couple will be tax-free – currently the estate tax is at $5.43 million or $10.86 million per married couple).
Trump: Eliminate the estate tax.
I leave it to you to think about how these proposed changes to the tax policy will impact you and the country. Will increasing the federal deficit or government spending be a good thing? Will higher or lower taxes move the economy forward? If any of these changes are enacted, how will they impact you or your family? Could this impact your job, or future retirement? These are just a few questions that I leave you to consider.
Sources:
- http://www.cbpp.org/research/federal-budget/policy-basics-where-do-our-federal-tax-dollars-go
- http://taxfoundation.org/comparing-2016-presidential-tax-reform-proposals
- http://www.cnbc.com/2016/08/08/donald-trump-just-made-a-major-change-to-his-tax-plan.html
- http://www.bankrate.com/financing/taxes/trump-dumps-0-tax-rate-proposal/
- https://www.irs.gov/uac/newsroom/net-investment-income-tax-faqs
