LPA Foundation

Tax Plan Comparisons

Every 2016 candidate for president has described his or her ideas on taxes, while some have released specific tax plans for 2016. See what each candidate is saying about personal income taxes, corporate taxes, and other forms of taxes in LPA’s summary below. Although some candidates have dropped out of the race, their tax plans are still included here to show what ideas have been proposed.

Candidates’ Tax Plans

Hillary Clinton

  • No detailed tax plan released to date.
  • Proposed raising taxes on capital gains held less than 6 years as well as a tax on high-frequency trading.
  • Favors “Buffett Rule” imposing minimum 30% effective tax rate on those earning $1 million or more annually and treating carried interest as regular income to increase taxes on wealthy.

This plan would double down on the punishing double taxation of savings and investment. It would also raise taxes on taxpayers making above $5 million. These soak-the-rich policies would have the effect of reducing investment and growth. The Tax Foundation estimated that “the plan would reduce the size of gross domestic product (GDP) by 1 percent over the long term. This reduction in GDP would translate into 0.8 percent lower wages and 311,000 fewer full-time equivalent jobs.”

  • Proposed targeted tax cuts to businesses that share profits with workers and made unspecific references to simplifying and lowering taxes on small businesses.

The plan continues the liberal tradition of trying to influence the way business owners run their business.

Ted Cruz

Personal Income Taxes

  • Flat tax rate of 10% on all income
  • Increases standard deduction to $10,000 per filer
  • Eliminates all tax credits and deductions except for the child tax credit, earned income tax credit (which is increased 20%), and the charitable giving and home mortgage deductions.
  • Eliminates the FICA payroll tax on employees as well as the death tax and alternative minimum tax

Thanks to a low tax rate on personal income, the plan ends the harsh penalties imposed on productive behaviors by the current system. It would also end many deductions, allowing capital formation which would boost wages over time. Unfortunately, the plan is far from a pure flat tax. It doesn’t fully end the double taxation of income that is saved and invested. It also maintains some favored interests’ preferences in the tax code and expands the misguided EITC.

Corporate Income Taxes                                                                                          

  • Eliminates corporate income tax and replaces it with 16% value-added tax
  • Taxes corporate profits held overseas at a one-time 10% assessment

This is the most problematic part of the plan. First, the choice of a VAT-like tax carries the enormous risk of turning America into Europe, well-known for having both a VAT and an income tax. This means bigger government and slower economic growth.

Second, it suffers from a serious lack of transparency. Business taxes are ultimately passed through to individuals in the form of lower wages, reduced dividends, or higher prices, and hence, they are not transparent — and unfairly tax people without their knowledge.

Even though this plan abolishes the corporate income tax, it also expands the business tax base quite dramatically, since businesses can’t deduct wages and benefits under this system, and both labor income and capital income are taxed at the business level. According to the Tax Foundation, under the plan 71 percent of the tax revenue will come from the plan’s business tax.

Bernie Sanders

  • Proposes a top tax rate of 52 percent on income above $10 million, along with a hike in tax rates to 37 percent for everyone earning more than $250,000, 43 percent for incomes above $500,000, and 48 percent above $2 million.
  • Would treat capital gains as ordinary income, significantly raising taxes as well.
  • Would apply Social Security taxes to income over $250,000.
  • Said Social Security taxes could be raised on all workers to fund benefit increases.
  • Favors ending deferral of taxes on corporate income earned overseas but not repatriated.
  • Proposed financial transaction tax of 0.5% on stock trades and a lower rate on bond and derivative trades.

If implemented, this plan would be incredibly punitive and hinder economic growth dramatically. It would significantly increase taxes on federal income, payroll, business, and estate taxes, and impose new excise taxes on financial transactions and carbon. According to the Tax Foundation, the proposal would raise $13.6 trillion over the next decade on a static basis, or $9.8 trillion on a dynamic one.

All income groups would feel the pinch, but most of the money would come from high-income households. Income that is currently saved and invested would take a gigantic hit. As the liberal Tax Policy Center notes, “[H]is proposals would raise taxes on work, saving, and investment, in some cases to rates well beyond recent historical experience in the US.”

These taxes will reduce people’s willingness to invest, which in turn reduces the capital stock (i.e., the amount of computers, factories, equipment) making workers less productive over time, which then decreases future workers’ wages. Also, since there is less capital available, return on what capital is still available goes up. As Andrew Lundeen from the Tax Foundation notes, the result is “wage earners make less and capital owners make more.” That’s a reduction of workers’ mobility and increases inequality.

As they say, the road to hell is paved with socialist intentions.

Donald Trump

Personal Income Tax

  • 3 rates: 10%, 20%, 25%
  • The first $25,000 of income for an individual and $50,000 for a married couple is tax exempt
  • Charitable giving and home mortgage interest deductions remain while unspecified other tax credits and deductions are reduced or eliminated
  • Business income is taxed at 15%

It is not a flat tax but it reduces the top marginal tax rate and would encourage productive behavior. Unfortunately, it wouldn’t removal most double taxation of income saved and invested and retains too many deductions to favored interests and activities. It also removes a large number of taxpayers from the tax rolls, exacerbating the illusion of many that government services are free.

Corporate Income Tax

  • Reduces rate to 15%
  • One-time tax of 10% on profits currently held overseas; eliminates the deferral of taxes on profits earned overseas
  • Cap on interest deductibility as well as elimination of unspecified business tax credits and deductions

The good: It includes a big reduction in the very high rate imposed on companies. The bad: It would increase the capital gains tax burden for partnerships that receive “carried interest.” The ugly: it would impose worldwide taxation on businesses.

Out of the Running:

Jeb Bush

Personal Income Taxes

  • 3 rates: 10%, 25%, 28%
  • Nearly doubles standard deduction
  • Eliminates death tax and Alternative Minimum Tax
  • Cap deductions for wealthy taxpayers

The Bush plan is far from an ideal flat tax along the lines of the Hall Rabushka model (one low rate, neutral base, no double taxation of savings and investment). However, it moves in the right direction. It reduces the top marginal rate and reduces the number of brackets, which is a proven way to grow the economy.

Unfortunately, by doubling the standard deduction, it continues a dangerous trend that removes a large number of taxpayers from the tax rolls. Those who do not pay taxes may be under the impression that government is free and demand more of it.

With regard to deductions, the Bush plan also is moving in the right direction. It would get rid of or reduce carve outs for favored interest groups while preserving the deductions that alleviate the double taxation of investments and savings.

Corporate Taxes

  • Lowers rate to 20% from 35%
  • Eliminates taxation of profits earned outside U.S., imposes one-time tax of 8.75% on profits currently held overseas

The plan rightly moves away from the current high corporate tax rate and worldwide tax system. It would lower the rate and move to a territorial system where the U.S. doesn’t tax income earned abroad.

  • Full expensing for capital investment

This is an important reform to end the punishing double taxation of savings and investment.

Ben Carson

  • Proposed a tax rate of 14.9% for individuals above 150% of the federal poverty level, and the same rate for corporations. Below 150% of the poverty level, all citizens would pay a “de minimis” amount of $100.
  • Would eliminate all deductions, including those for charitable giving, state taxes, and home mortgage interest.
  • All capital investments would be fully deductible as a business expense.
  • Previously proposed as a one-time “tax holiday” for repatriating corporate profits currently held overseas as long as 10% is reinvested in the U.S., but would otherwise have taxed overseas profits at the same 14.9% rate.

This plan is best described as a pure flat tax similar to that originally proposed by Hall and Rabushka. On top of being pro-growth and boosting competitiveness, it gets rid of many deductions for favored interests, ends the punishing double taxation on savings and investments in the current tax code, and reduces the number of taxpayers paying no income tax.

It also implements good corporate income tax reform by moving to a territorial system and lowering the tax rate.

Jim Gilmore

Personal Income Taxes

  • 3 rates: 10%, 15%, 25%
  • Dividends and capital gains are tax-free
  • Charitable giving and home mortgage interest remain tax-deductible

The plan is not an ideal flat tax. However, it lowers the marginal tax rates, which would encourage productive behaviors. It would also end the double taxation of income that is saved and invested, which is guaranteed to produce growth over time. Unfortunately, it also maintains some favored interests’ preferences in the tax code.

 Corporate Income Taxes

  • Reduces rate to 15%
  • Allows full expensing of capital investment
  • Allows tax-free repatriation of profits earned overseas

The large reduction of the corporate tax rate and what looks like a move toward a territorial tax system would be a serious improvement over the current system.

John Kasich

Personal Income Tax

  • 3 rates: 28% for top earners and two lower, as-yet-unspecified rates
  • Capital-gains rate of 15%
  • Eliminate or scale back most deductions while preserving them for charitable giving and home mortgage interest

It is not a flat tax, but it does lower the top marginal tax rate. Unfortunately, it doesn’t end the double taxation of income that is saved and invested, and it retains some special interest deductions.

Corporate Income Tax

  • Lowers rate to 25%
  • Allows full expensing for capital investment
  • Adopts territorial system that doesn’t tax profits earned overseas, imposes a one-time tax on profits currently held overseas (rate unspecified but said to be “low”)

The corporate reform is an improvement over the current system since it lowers the tax rate and moves to a territorial system. However, it would have been better if the personal and corporate top marginal rate had been the same.

Marco Rubio

Personal Income Tax

  • 3 rates: 15%, 25%, 35%
  • Eliminates all itemized deductions while making charitable contribution and home mortgage deductions available to all taxpayers
  • Creates partially refundable tax credit of $2,500 per child, on top of current $1,000 child tax credit
  • Eliminates taxes on interest, dividends and capital gains

It eliminates double taxation of income that is saved or invested, which is good. But it fails to eliminate all deductions for favored interests. However, the more problematic feature of the plan is its giant child tax credit. Setting aside the disturbing social engineering aspect of the tax credit, it has also a significant opportunity cost in terms of the possible tax reforms it crowds out. Because its cost is so large, the reform can only afford to reduce the top income tax rate down to 35 percent from its current 39.5 percent and it raises marginal tax rates on a significant number of middle-class and upper-middle class households. The opportunity costs in terms of economic growth is also very large since tax credits do nothing for growth as opposed to large reductions in the top marginal rates.

 Corporate Income Taxes

  • Lowers corporate rate to 25%
  • Allows immediate expensing of capital investments
  • Switches to territorial tax system allowing future profits earned overseas to be exempt from taxes, levies a 6% tax on profits currently held overseas

This part of the plan is very good. It features a solid reduction of the corporate rate along with sweeping reductions in double taxation and the end of punitive depreciation rules. The result would be more savings, more investment and more growth.