Taxes: Hillary Clinton vs. Donald Trump

Image source: Getty Images.

Ready or not, the presidential election that will decide who becomes the 45th president of the United States is just one month away. Regardless of who wins, we're bound to see history made with either Democratic nominee Hillary Clinton becoming the first woman president or Republican Donald Trump ascending to the Oval Office despite having no political or military background.

Hillary Clinton vs. Donald Trump on taxes

As we near the Nov. 8 election date, the issues most important to the American people are coming to the forefront -- perhaps none more so than taxes. Every American who earns income has a financial interest in how each candidate plans to grow the U.S. economy while generating enough federal tax revenue to fund critical programs and meet the government's obligations.

With this in mind, let's take a closer look at both candidates' very different approaches to federal tax reform.

Democratic presidential nominee Hillary Clinton. Image source: Disney-ABC Television Group via Flickr.

Hillary Clinton on tax reform

Clinton has laid out quite a few tax reform proposals to date, and the vast majority center on one idea: having wealthier Americans pay more. In particular, Clinton is looking to alter the way the rich are taxed on ordinary income, capital gains, estate taxes, and Social Security.

1. Ordinary income tax reform

The easiest way to visualize the Clinton tax proposal (and Trump's below) is to examine the current seven progressive ordinary income tax brackets and then the Clinton proposal. Below you can see the current progressive income tax brackets based on data from the Internal Revenue Service in 2016.

Table by author. Data source: Internal Revenue Service.

Now, let's have a look at Clinton's proposed tax reform:

Table by author. Data source: Tax Foundation, Hillary Clinton campaign website.

As you can see, Clinton aims to add a 4% surtax on earned income above $5 million, which would add an eighth progressive bracket and bring the new highest ordinary income tax rate to 43.6%. The remainder of the tax brackets for earned income below $5 million (at least with respect to ordinary income) would remain unchanged.

Clinton has also trumpeted the "Buffett Rule," which would ensure that those with $1 million or more in income pay at least a 30% tax rate.

2. Capital gains tax reform

In addition to taxing ordinary income for the very well-to-do, Clinton has proposed altering the long-term capital gain tax benefits for those people with at least $5 million in earned income.

Under the current system, short-term capital gains on investments are taxed at your peak ordinary tax bracket, while long-term capital gains (defined as profits on the sale of assets held for at least 366 days) are taxed at a substantially lower rate. If your peak ordinary income falls into the 10% or 15% bracket, you'll owe 0% in long-term capital gains. If you're peak ordinary income is in the 25%, 28%, 33%, or 35% bracket, then your long-term capital gains tax rate is 15%. Finally, if you're in the highest current ordinary income tax bracket, then your long-term capital gains tax rate is 20%.

Under Clinton's proposal, medium-term and long-term capital gains for people with incomes of $5 million or more would be taxed at a substantially higher rate. Investors wouldn't see any reduction in long-term capital gains taxes until they held their investment for at least two years, and they wouldn't see the current 20% rate unless they were to hold for six or more years.

Additionally, high-income earners would almost assuredly be subject to the net investment income tax of 3.8%, as well as the aforementioned 4% surtax on earned income above $5 million in a given year.

Table by author. Data source: Tax Foundation. "Marginal Tax Rate" = capital gains tax rate before net investment income tax and surtax on incomes exceeding $5 million.

3. Estate tax reform

Clinton is also taking aim at estate tax reform. She proposes boosting the estate tax rate to 45% from 40% on estates valued at more than $5.45 million per person (the federal exemption level in 2016). A more recent proposal would impose a 50% tax on estates over $10 million a person, a 55% tax on estates over $50 million per person, and a 65% tax on estates over $500 million for an individual or $1 billion for joint filers.

4. Social Security payroll tax reform

Fourth, Clinton aims to reform the Social Security payroll tax. Currently, earned income up to $118,500 is taxed at a rate of 12.4% (usually split down the middle between you and your employer), meaning any income above this amount is free and clear of being taxed by Social Security.

Image source: Pixabay.

Clinton hasn't proposed a specific dollar figure, but she'd like to see the payroll tax earnings cap raised so that the well-to-do pay more into the program. Clinton's plan would keep the existing tax on income of $1 to $118,500 in place, implement a moratorium on payroll tax collection between $118,500 and, say, $200,000 or $250,000, and then reinstitute the 12.4% tax on all earned income above $200,000 or $250,000.

5. Closure of certain tax loopholes

Finally, Clinton wants to get rid of a number of tax loopholes, including the Bermuda reinsurance loophole. This loophole has allowed hedge fund managers to form reinsurance companies in Bermuda that can ultimately allow them to avoid higher ordinary income tax rates and instead pay lower capital gains tax rates on their earnings when assets are sold.

Clinton has also suggested that she would cap contributions to tax-advantaged retirement tools like a Roth IRA, traditional IRA, or 401(k), when the cumulative value of these accounts reaches $3.4 million.

Republican presidential nominee Donald Trump. Image source: Disney-ABC Television Group via Flickr.

Donald Trump on tax reform

Meanwhile, Donald Trump's tax proposals take a very different approach. Instead of aiming to tax wealthier individuals, Trump is targeting a number of tax cuts that he believes will spur economic growth.

1. Ordinary income tax reform

Trump's campaign message concerning taxes has been all about simplicity, and you can see that in his ordinary income tax proposal. Trump's tax plan would eliminate the aforementioned seven progressive tax brackets and replace them with three progressive income tax brackets of 12%, 25%, and 33%, which you can view below. You'll also note that Trump's tax proposal is essentially identical to what House Republicans have been proposing.

Table by author. Data source: Donald Trump campaign website. 

Unlike Clinton, Trump would keep the peak long-term capital gains tax rate unchanged at 20%. However, the one similarity the candidates share is that both would push for carried interest to be taxed as ordinary income. Carried interest is currently taxed at the capital gains tax rate.

2. Corporate income tax reforms

Perhaps the most defining reform Trump has called for is the reduction in the corporate income tax rate from 35% to 15%. The United States' corporate income tax of 35% is one of the highest in the world. Trump believes that by dramatically lowering this tax and allowing businesses to keep more of their profits, we could spur companies to grow, create jobs, and perhaps make more mergers and acquisitions. Furthermore, lower corporate income tax rates could lead to increased foreign investment in the U.S.

On top of reducing corporate income tax rates, Trump would allow companies to repatriate income being held overseas at a special tax rate of just 10%. With more than $2 trillion estimated to be held by U.S. corporations in overseas markets, this money could boost job creation and business reinvestment.

3. Elimination of the NIIT, estate tax, and AMT

Among the tax reforms proposed by Donald Trump, quite a few involve eliminating certain tax regulations. For example, the aforementioned net investment income tax, or NIIT, is a 3.8% tax levied on investment income for individuals earning more than $200,000, or $250,000 for joint filers. Clinton plans to keep the NIIT in place, whereas Trump would eliminate it.

Image source: Getty Images.

Trump has also taken exception with the estate tax, which he proposes eliminating. However, Trump does note on his campaign website that capital gains valued at over $10 million that were held until death would be subject to tax.

Trump also has plans to eliminate the Alternative Minimum Tax, which is a supplemental income tax imposed by the IRS on wealthier individuals who may be using a variety of tax loopholes to lower their effective tax rate to an artificially low level.

4. Big standard deduction increases for Americans (and parents), with a few exceptions

Finally, Trump's tax plan aims to boost standard deductions for everyone, with an added bonus for parents.

Aside from eliminating the head-of-household filing status and personal exemptions, single filers will see their standard deduction rise from $6,300 in 2016 to $15,000. Meanwhile, joint filers would see their standard deduction increase from $12,600 in 2016 to $30,000.

Trump has also proposed specific tax breaks for parents concerning child-care costs. Under Trump's tax proposal, Americans would be able to take above-the-line deductions on child-care expenses for children under the age of 13. These deductions would be capped at the state average dependent on the age of the child, and it would not be allowed for individuals with incomes over $250,000, or couples with more than $500,000 in income.

Trump also favors spending rebates for certain child-care expenses that lower-income families could claim through the Earned Income Tax Credit. Single filers earning up to $31,200, and married filers with up to $62,400 in income would qualify, and the ceiling on income would increase each year with inflation.

Which candidate has the better tax plan? Now that you have the facts, it's up to you and more than 219 million other voters to decide.