Image source: Bernie Sanders. 

The election year is officially in full swing with the Iowa caucuses now in the rearview mirror. All elections are important in their own right, but 2016 stands as especially important for the voting public since we'll be electing our first new president in eight years -- a president who could wind up affecting your wallet in a variety of ways.

Bernie Sanders unveils his tax reform plan
As the campaign among the remaining candidates from both parties has matured, we've also begun to see more detailed plans emerge. The Social Security, Medicare, and even tax reform plans of many front-runners are now available for voters to peruse. Today, we'll take a closer look at the income tax plans Democratic Party candidate Bernie Sanders has said he would implement should he reach the oval office.

Image source: Pixabay.

Sanders' tax plan is intriguing in that he's looking to raise taxes on everyone, not just high-income households. However, as you'll see below, well-to-do households will fund the majority of the tax revenue increase under Sanders' tax reform plan.

According to research from the Tax Foundation, Sanders' tax plan would, on a static basis, raise $13.6 trillion over the next decade, mostly from a combination of payroll tax increases and individual income tax hikes. When taking into account the perceived economic impact of Sanders' plan, the Tax Foundation estimates a positive revenue impact of approximately $9.8 trillion over 10 years.

How might Sanders' tax plan affect you?
A substantial amount of money would be raised by a 6.2% income-based tax on corporations, which is primarily being used to fund a universal healthcare program for all Americans. However, individual income tax increases are also expected to generate significant additional revenue if Sanders' plan is enacted.

Here's what the individual income tax brackets look like right now for the 2016 tax year:

Ordinary Income Capital Gains and Dividends Single Filers Married Filers Heads of Household
10% 0% $0-$9,275 $0-$18,550 $0-$13,250
15% 0% $9,275-$37,650 $18,550-$75,300 $13,250-$50,400
25% 15% $37,650-$91,150 $75,300-$151,900 $50,400-$130,150
28% 15% $91,150-$190,150  $151,900-$231,450 $130,150-$210,800
33% 15% $190,150-$413,350 $231,450-$413,350 $210,800-$413,350
35% 15% $413,350-$415,050 $413,350-$466,950 $413,350-$441,000
39.6% 20% $415,050+ $466,950+ $441,000+

Table by author. Data source: Tax Foundation and IRS, 2016 income tax brackets. 

And here's what things might look like if Bernie Sanders becomes president and is able to put his plan into action:

Ordinary Income  Capital Gains and Dividends Single Filers Married Filers Heads of Household 
12.2% 2.2% $0-$9,275 $0-$18,550 $0-$13,250
17.2% 2.2% $9,275-$37,650 $18,550-$75,300 $13,250-$50,400
27.2% 17.2% $37,650-$91,150 $75,300-$151,900 $50,400-$130,150
30.2% 17.2% $91,150-$190,150 $151,900-$231,450 $130,150-$210,800
35.2% 17.2% $190,150-$250,000 $231,450-$250,000 $210,800-$250,000
39.2% 39.2% $250,000-$500,000 $250,000-$500,000 $250,000-$500,000
45.2% 45.2% $500,000-$2,000,000 $500,000-$2,000,000 $500,000-$2,000,000
50.2% 50.2% $2,000,000-$10,000,000 $2,000,000-$10,000,000 $2,000,000-$10,000,000
54.2% 54.2% $10,000,000+ $10,000,000+ $10,000,000+

Table by author. Data source: Tax Foundation. Based on 2016 income tax parameters. 

If implemented, all Americans would see an increase in their marginal tax rate of 2.2%, which is estimated to raise nearly $2.5 trillion over 10 years. This tax is known as the "healthcare premium" in Sanders' plan, and it's paired with the aforementioned 6.2% employer tax to help pay for a universal health program. You'll note the 10%, 15%, 25%, and 28% marginal tax brackets all have an extra burden of 2.2% under Sanders' tax reform plan. It's also worth noting that by Sanders' calculations a family of four earning less than $28,800 per year wouldn't owe any tax under the new plan.

Secondly, Sanders' plan would create four new income tax brackets for households earning $250,000 and up. These top-end brackets are 37%, 43%, 48%, and 52%, as you can see above. However, since all Americans are subject to the healthcare premium, these brackets would see a 2.2% bump higher (thus 39.2%, 45.2%, 50.2%, and 54.2% at the top-end).

Image source: Pixabay.

Finally, Bernie Sanders wants to do away with the preferential tax treatment of capital gains and dividends by taxing them as ordinary income for households earning more than $250,000 per year. In addition, the 2.2% healthcare premium would apply for all Americans claiming capital gains and dividend income, regardless of their household income. This means the two lowest marginal income tax brackets would rise from 0% to 2.2%, the next three marginal tax brackets (comprising individual income between $37,650 and $250,000) would owe 17.2%, up from 15%, and then beyond that the capital gains and dividend tax would match the ordinary income tax, which is a large jump from the current tax of 20%.

In addition to these income tax bracket changes, Sanders has plans to apply Social Security payroll taxes on individual incomes over $250,000, eliminate the alternative minimum tax, and limit tax deductions to 28% for households with incomes over $250,000.

Potential implications
Based on initial estimates provided by the Tax Foundation, more tax revenue would be created, but it would come at a cost to the U.S. economy and all taxpayers. Over the next 10 years the Tax Foundation estimates roughly 6 million jobs would be lost, a 4.3% reduction in wages would occur, U.S. GDP would drop by nearly 10%, and we'd witness a whopping 18.6% fall in capital investments.

Furthermore, Tax Foundation projects an average drop in after-tax income of 10.6% on a static basis for Americans. Taxpayers in the bottom 40% of the income ladder would see their static after-tax income fall between 4.9% and 6.9%. By contrast, taxpayers in the top 1% of income are estimated to see their after-tax income fall by 17.9% on a static basis under Sanders' plan.

This perceived weakness helps explain why Tax Foundation believes Sanders' tax reforms could generate $13.6 trillion in revenue, but would ultimately only provide a $9.8 trillion boost when the impact of those taxes are factored into its models.

Image source: Flickr user Joi Ito.

Benefits and concerns
The obvious benefit of Sanders' tax reform is that it would help eliminate what's been a fairly large federal budget deficit in Washington since the recession. Balancing the budget, or working with a surplus, could allow the U.S. to healthfully manage its interest payments on its more than $18 trillion in outstanding debt.

The crown jewel of Sanders' plan, though, is the implementation of Medicare for All. The creation of a universal health plan could push down healthcare costs dramatically by allowing the government to use its clout to negotiate drug and device prices. It would also work to de-link healthcare from the workplace, removing the potential stress involved with finding a new health plan when changing jobs.

The downsides of Sanders' proposal? The big fear is the reduction in capital investments caused by taxing wealthier individuals at a much higher tax rate. If upper-income individuals have less disposable cash on hand, we could see less spending, less job creation, and fewer businesses started.

Along those same lines, taxing capital gains and income as ordinary income could be the real economic killer. The allure of holding investments over the long-term is that you'll be rewarded with a lower tax rate. Not only is this beneficial in that it allows an investor to keep more income, but it also encourages good investing habits, since compounding works in favor of the long-term investor. Removing this incentive could have a profoundly negative impact on well-to-do investors, and stocks in general.

Finally, Sanders' employer tax could very well wind up passed along to consumers in the form of higher prices, or be taken out of employees' wages (or perhaps some combination of the two). Substantially higher corporate costs could reduce foreign investment in U.S. companies even further, and could bring hiring to a standstill.

Keep in mind that these benefits and concerns are nothing more than assumptions at present, but it doesn't hurt to take a closer look at how your own bottom-line might be affected if Bernie Sanders becomes president and he enacts his tax reform measures.

How would you fare under Sanders' new tax plan? Share your comments below.