Most of us are working hard to make money -- to keep a roof over our heads, to put food on the table, to save for retirement, and, among other purposes, to enjoy. Thus, it can hurt when we have to fork over a chunk of our earnings to Uncle Sam, for taxes. With the 2016 presidential election campaign in full swing, it's worth taking some time to see where the presidential candidates stand on taxes -- because depending on who wins, there's a good chance your taxes will go up or down.
Bernie Sanders on taxes
Senator Sanders is unlikely to become the Democratic nominee, but as of this writing, he's still in the race. So let's look at what he says about taxes on his campaign website. He's known, of course, for decrying income and wealth inequality in America, and his plan addresses that with various proposals. Here are some:
- To have the wealthy and large companies "pay their fair share in taxes," Sanders "will stop corporations from shifting their profits and jobs overseas to avoid paying U.S. income taxes." His website continues: "He will create a progressive estate tax on the top 0.3% of Americans who inherit more than $3.5 million. He will also enact a tax on Wall Street speculators who caused millions of Americans to lose their jobs, homes, and life savings."
- Social Security will be strengthened "by lifting the cap on taxable income above $250,000." You may not realize it, but everyone's income faces the same tax rate for Social Security -- only up to a certain amount. (As of 2016, the cap on taxation of earnings was $118,500.) Thus, in 2016, someone earning $118,500 and someone earning $5 million will pay the same Social Security tax, with the latter person's earnings above $118,500 going untaxed -- a fact that many see as unfair. Sanders wants to raise the cap "above $250,000." (That's not as specific as it could be, as it doesn't preclude eliminating the cap entirely, something that many taxpayers would see as rather fair.)
Sanders has also proposed various changes in taxation to pay for many new benefits for the middle class and other Americans. For example:
- He wants to spend $1 trillion on improving our infrastructure, creating jobs along the way. He would offset that cost by closing the loophole that lets many corporations avoid paying billions in taxes by keeping billions in offshore tax havens.
- He would make public colleges free for all, paid for by taxing Wall Street speculators. A small tax on every trade, for example, would be felt by those who trade frequently and not so much by individual long-term investors.
- He wants America to offer at least 12 weeks of paid family leave and medical leave and would offset that by raising payroll taxes -- of about $1.61 per week for the average worker.
- He wants every American to have healthcare coverage and would pay for that with "a 6.2% income-based healthcare premium paid by employers, a 2.2% income-based premium paid by households, progressive income tax rates, taxing capital gains and dividends the same as income from work, limiting tax deductions for the rich, adjusting the estate tax, and savings from health tax expenditures."
- He would prevent cuts to pensions by "closing two tax loopholes that allow the wealthy to avoid taxes on money they inherit and expensive artwork they collect."
Hillary Clinton on taxes
Hillary Clinton, meanwhile, does seem likely to be the Democratic nominee. Here's some of what her website and other reports tell us about her tax plans:
- She would enact the "Buffett Rule," so that "no millionaire pays a lower effective tax rate than their secretary." (Buffett has repeatedly criticized our tax system by pointing out that he pays a lower tax rate than his secretary does and by calling for higher taxes on the wealthy.) It would involve a minimum 30% tax on incomes over $1 million. Taxable incomes over $5 million will face a 4% surcharge.
- She'll cap the tax value of certain tax deductions and exclusions at 28%, preventing many from shrinking their tax bills to a great degree via deductions.
- She will offer a tax break for caregivers -- those (often women) who are often out of the workforce a little or a lot and often spend some of their own money caring for others: "Hillary will offer a 20 percent tax credit to help family members offset up to $6,000 in caregiving costs for their elderly family members, allowing caregivers to claim up to $1,200 in tax relief each year," her website states.
- The American Opportunity Tax Credit, which offers tax breaks worth up to $2,500 per student to offset college costs, is set to expire after 2017. Clinton wants to extend it indefinitely.
- She's offering a 15% tax credit "for companies that share profits with workers on top of wages and pay increases."
- To foster more long-term investing and also to levy more taxes on the wealthy, she's aiming to increase the capital gains tax rate on the highest earners -- those in the top tax bracket. (In 2016, they're individuals earning more than $415,050 and those married and filing jointly who earn more than $466,950.) These folks currently pay a long-term capital gains tax rate of 20% on assets held for more than a year (vs. the 15% that most of us face.) She's going to retain that 20% but will require these top earners to hold on to the assets in question for more than six years in order to qualify for the 20% rate. Those holding between one and two years will face a 39.6% rate, the same as that for their ordinary income. If they hold between two and three years, the rate falls to 36%; between three and four years, to 32%; between four and five years, to 28%; between five and six years, to 24%, and more than six is at 20%.
- She plans to generate additional revenue by taxing high-frequency traders who place millions of trades annually with the help of algorithms and automation.
- She would tax more estates, but only those valued at more than $3.5 million, and only on the value above $3.5 million. (That limit has recently been $5.45 million.) (Note that for married couples, the limit is $7 million.)
Overall, the vast majority of tax changes will result in the top 1% of earners paying more in taxes, with the rest of us not seeing much change in our taxes -- though some will see measurable relief, via the extended education credit, the caregiver credit, and more.
Donald Trump on taxes
The Tax Foundation has summarized Donald Trump's tax proposals, and here are key provisions that affect individual taxpayers:
- He will reduce the number of tax brackets to just four: 0%, 10%, 20%, and 25%, with that top rate applying to income over $150,000 for single filers and $300,000 for joint filers. The upside of this is simplification, but it greatly reduces the taxes the wealthy pay.
- He is looking to phase out most deductions except those for mortgage interest and donations to charity.
- He will eliminate the estate tax entirely. This will help wealthy people pass a lot of money on to their heirs tax-free.
- The Alternative Minimum Tax has grown into a major thorn in the side of many taxpayers due to not having been indexed for inflation since its creation in 1978, and it now hits many taxpayers of modest means instead of the wealthy it was designed to tax. Trump is looking to eliminate the AMT.
Trump will also give significant tax relief to corporations, lowering their top tax rate to 15%. (Note that corporations will be taxed at lower rates than the top two rates for individuals.) He is also looking to end the practice of many global companies of deferring taxation by keeping a lot of earnings abroad. He will repatriate all that money, levying a 10% tax against it.
The Tax Policy Center, in assessing Mr. Trump's tax plans, has warned:
His proposal would cut taxes at all income levels, although the largest benefits, in dollar and percentage terms, would go to the highest-income households. The plan would reduce federal revenues by $9.5 trillion over its first decade before accounting for added interest costs or considering macroeconomic feedback effects. The plan would improve incentives to work, save, and invest. However, unless it is accompanied by very large spending cuts, it could increase the national debt by nearly 80% of gross domestic product by 2036, offsetting some or all of the incentive effects of the tax cuts.
These candidates still have about five months until the general election, so further clarification and even new proposals about tax reforms may surface. If you're interested in knowing whether you're likely to pay a lot more or less in taxes, keep up with the candidates and where they stand on taxes.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns no shares of any company mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.