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5 Tax Changes Hillary Clinton Is Fighting for

By Matthew Frankel, CFP® – Oct 2, 2016 at 9:02AM

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The Democratic presidential candidate's plan calls for raising taxes on the wealthy and closing loopholes.

Image source: Getty Images.

Democratic presidential candidate Hillary Clinton wants to change our tax code to make sure that those at the top are paying their fair share, and that working families and small businesses get the tax relief they need. Specifically, here are five things Hillary Clinton wants to change if she gets elected president in November.

The "Buffett rule"

Billionaire investor Warren Buffett is one of Hillary Clinton's most prominent supporters, and has used his own taxes as a shining example of the unfairness of the American tax system. Buffett has earned billions of dollars in some years, and has paid a lower effective tax rate than his secretary.

The so-called Buffett rule is simple. If implemented, it will ensure that all people who make more than $1 million per year must pay at least a 30% effective tax rate, greater than the effective tax rate of the entire middle class.

Make it financially difficult to move jobs overseas

Companies moving out of the U.S. create an obvious problem: They take jobs and production with them. Clinton hopes to fix this by charging an exit tax on untaxed overseas earnings to companies who leave the U.S. Currently, companies can hold foreign profits overseas and defer the U.S. taxes they owe. Then, by moving their operations away from the U.S., they can avoid paying any taxes whatsoever on these profits. Under Clinton's plan, taxes will need to be paid on these unrepatriated profits.

On the other side of things, Clinton wants to incentivize companies to bring jobs back into the U.S. from abroad. One example of this is her recently proposed Manufacturing Renaissance Tax Credit, which would encourage job creation and investment in downtrodden U.S. communities.

Reduce taxes on small businesses

This is one area where both sides agree: Small businesses are paying too much tax. Clinton's plan calls for simplifying and cutting taxes on small businesses. According to Clinton's campaign website, the average small business, defined as having one to five employees, spends 150 hours and $1,100 per employee on tax compliance.

While it's unclear at this point exactly what these cuts and simplifications will be, one specific change will allow small businesses to immediately deduct their expenses, as opposed to writing them off over a period of several years.

Charge an additional tax to the wealthiest Americans

Clinton's plan includes a 4% "Fair Share Surcharge" on Americans who make more than $5 million per year. This would only affect 0.02% of all taxpayers, and would only be assessed on income above the $5 million threshold. This is intended to ensure that the richest Americans pay a higher effective tax rate than the middle class.

In addition, Clinton plans to expand the estate tax, especially for the richest Americans with estates valued in the tens or hundreds of millions of dollars. This includes raising the maximum estate tax rate to 65% for estates valued at $1 billion or more, lowering the exemption amount, and eliminating loopholes that let people make their estate's value appear lower than it actually is.

Close tax loopholes

To ensure fairness in the tax code, Clinton's plan would close several loopholes that allow the rich to avoid taxes, and names these three in particular:

  1. The Bermuda reinsurance loophole, which high-income money managers use to avoid paying taxes by using reinsurance transactions (often located in Bermuda).
  2. The Romney loophole, which allows wealthy Americans to shelter tens of millions of dollars in tax-advantaged accounts. This is named for Mitt Romney, who once disclosed that his IRA was worth over $100 million thanks to non-public securities he was allowed to shelter in it.
  3. The carried interest loophole that allows hedge fund and other money managers to avoid paying ordinary income tax on their earnings. Basically, this allows these individuals' income to be taxed at more favorable capital gains rates (maximum of 23.8%) as opposed to ordinary income (up to 43.4%, including the 3.8% surtax).

The pros and cons of Clinton's plan

While Clinton's plan would undoubtedly increase tax revenue, the million-dollar question is whether or not it would limit economic growth. In fact, the non-partisan Tax Foundation did an analysis and found that Clinton's plan would actually reduce GDP by 1% over the long term.

On the other hand, it wouldn't add trillions to the national deficit like rival Donald Trump's plan almost certainly would. Even after accounting for the economic effects of the tax changes, the Clinton plan would increase federal tax revenue by $191 billion over the next decade.

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