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Trump stands by the Republicans’ view of fiscal conservatism with smaller government and less taxes. Clinton’s plan, on the other hand, echoes the values associated with the Democratic Party, with an increase in taxation, especially for the wealthy.
The next president will likely move on a long overdue Internal Revenue Code reform while in office. The current iteration of the tax code was enacted in 1986 and has been amended and tweaked every year since then. That has left a patchwork of rules that hobbles along but is not very efficient in today’s world.
It’s hoped an all-encompassing reform of the Internal Revenue Code would update the rules to meet the needs of today’s taxpayers and eliminate the irrelevant ones.
Let’s dive into what each presidential candidate plans to offer.
Trump’s tax plan would substantially lower individual income taxes and the corporate income tax. This would be accomplished by consolidating the current seven tax brackets into four, with a top marginal income tax rate of 25 percent, instead of 39.6 percent.
Taxes on long-term capital gains and qualified dividends would be 20 percent. The plan would also reform the business tax code by reducing the income tax on all businesses to 15 percent, from 35 percent.
In addition, the plan would eliminate the estate tax and the alternative minimum tax. In true Republican form, the Net Investment Income Tax of 3.8 percent, which was passed as part of the Affordable Care Act, would be eliminated.
On the international side, the plan ends the deferral of income from controlled foreign subsidiaries, but preserves the foreign tax credit. It would also enact, as a transitional revenue raiser, a one-time deemed repatriation tax of 10 percent on all foreign profits currently deferred.
Clinton’s tax plan would increase income taxes and would keep the current tax brackets, but add a new bracket on taxpayers with incomes above $5 million at 43.6 percent.
Additionally, Clinton would enact the so-called “Buffett Rule,” which establishes a 30 percent minimum tax on taxpayers with an adjusted gross income of more than $1 million. There would be a limit on itemized deductions to a tax value of 28 percent.
Her plan also expands the Child Tax Credit by providing an additional $1,000 for children under 5 years old and a 20 percent credit for caregiver expenses. There would also be a possible $5,000 in tax relief for excessive health care costs.
Another significant part of Clinton’s plan is the expansion of the estate tax by reducing the exclusion from the current $5.45 million ($10.9 million for couples) to $3.5 million ($7 million for married couples) and adds progressive tax rates on estates with a top rate of 65 percent for estates worth $1 billion.
Long-term capital gains rates would be raised and tax deferred retirement accounts would be limited for higher income earners. 1,031 like-kind exchanges would be limited, but businesses expensing under Section 179 would be expanded.
The business startup deduction would also be increased to $20,000 and small businesses would have a “standard deduction.”
The ACA credit for small businesses would be expanded along with a broadening of the NIIT to include more business income.
Clinton’s plan is the mirror opposite of Trump’s.
Clinton’s plan would make the Internal Revenue Code more complex than it already is.
Also, according to the Washington, D.C.-based Tax Foundation’s September and October report on the tax plans, Clinton’s plan would be a detriment to the economy because businesses would have to pay additional taxes, which would discourage them from hiring workers or purchasing new equipment.
Those reports state that Trump’s plan, on the other hand, would boost the economy because businesses would have additional capital to purchase new equipment, make new investments and hire more workers. Trump plans to pair his tax proposal with an increase in infrastructure projects which would lead to a boost in good paying construction jobs.
These tax plans could be put to the test if a recession hits during the next presidential term. If Clinton’s plan is in place during a recession, the federal government could be forced to rush through tax cuts as well as new tax credits to stimulate the economy, which would look more like Trump’s current plan.
The only question now is, what will the voters decide Nov. 8?
– Darren J. Pluth is an associate attorney at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of taxation, real estate transactions, corporate, partnership and limited liability company law matters. He may be reached at 209-952-4545 or [email protected]