A new analysis of the tax proposals Democratic Presidential candidate Hillary Clinton has detailed so far, finds they would raise $1.1 trillion in additional revenue over the next decade, and another $2.1 trillion in the decade after that, at the expense of high earners, wealthy heirs, investors, the fossil fuels industry, multinationals, and any pretense of tax code simplicity.
If the changes were in full effect in 2017, the report from the Tax Policy Center estimates, the top 1% would pay an average of $78,284 in additional taxes, with their average effective federal tax rate rising 3.4 percentage points to 36.2%, (TPC defines the top 1% as those having expanded income, including some normally excluded items such as retirement account contributions and tax-exempt benefits, of more than $732,323). The top 0.1% (who have expanded income over $3. 77 million) would pay an average of $519,741 more, with federal taxes grabbing 39.2% of their incomes, an increase of 5 percentage points. Overall, 78% of Clinton's new taxes would be paid by the highest earning 1% , the TPC estimates.
The revenue and distributional effects of Clinton's proposed changes stand in sharp contrast to those of the leading Republican candidates, who have all proposed huge tax cuts with the benefits sharply tilted to the rich. For example, Donald Trump, by TPC's estimate, would reduce revenues by $9.5 trillion over the next decade, while the average federal tax rate paid by the top 0.1% would drop by 12.5 percentage points to 21.8% -- a bit more than half what it would be if Clinton had her way. Sen. Ted Cruz (R-TX), who has proposed a 10% flat income tax, combined with a form of value added tax (although he doesn't call it that), would reduce the tax rate on the 0.1% even more dramatically---to just 15.2%, a reduction of 19.1 percentage points, according to the TPC analysis. Sen. Marco Rubio (R-FL) would lower the average rate on the top 0.1% to 25.3%.
The Tax Policy Center hasn't yet released its analysis of the massive tax increases sought by Sen. Bernie Sanders, Clinton's primary opponent, but the Tax Foundation has estimated Sanders' proposals would increase revenues by $13.6 trillion over the next decade. (March 4 update: TPC has now estimated Sanders proposals would raise $15.3 trillion over the next decade.) While Sanders would raise taxes across the board to help pay for universal healthcare, tuition-free state colleges and other benefits, Clinton's tax hikes are targeted at the rich, with two thirds of increased revenue coming from three income tax provisions affecting higher income tax households and $161 billion of the total from estate tax changes, the TPC estimates. Clinton has also proposed targeted tax cuts for elder care expenses and out of pocket medical costs and says she will be offering more middle class tax breaks. But none of those cuts were included in the new analysis by TPC, which didn't have enough details on those cuts to estimate their cost, noted TPC Director Len Burman.
"This is a very incremental proposal,'' noted Burman. "It's not a major reform."
Among Clinton's new tax-the-rich proposals is a 4 percent surcharge on AGI in excess of $5 million per joint or individual taxpayer (but above $2.5 million per married taxpayers filing separately). That's creates a new high income marriage penalty. The AGI surcharge would count towards the 30% minimum tax, TPC says, based on information it received from the Clinton campaign.
The extra estate tax revenue would be raised through a reduction in the current estate tax exemption from its current $5.45 million to $3.5 million ($7 million for couples), and an increase in the estate tax rate from 40% to 45%--- a return to where it stood in 2009. Clinton's proposals would also return the gift tax exemption to $1 million and crack down on grantor trusts.
Clinton would also reduce the tax breaks for capital gains--but as is typical, in a complicated fashion. Taxpayers who wanted to benefit from the lower long term capital gains rate of 20% would have to hold assets for six years, up from the current one year. Under Clinton's proposal, assets held less than two years would be taxed as ordinary income, at a top rate of 39.6%, with that rate reduced about 4 percentage points for each additional year an asset is held. (All those rates are before the 3.8% net investment income tax introduced by Obamacare, which she would retain, or before her new surtax.
Clinton, like Obama, would tax carried interest---the 20% or so of profits that managers of private equity and hedge funds demand from their investors--as ordinary interest, instead of capital gains.
In January the Tax Foundation estimated Clinton's changes would bring in just $498 billion over the next decade---less than half the amount TPC projects they would raise. Much of that difference is accounted for by wildly divergent estimates of the impact of the capital gains changes. The Tax Foundation estimated that capital gains realizations would fall so much in response to the tax changes, that Uncle Sam would collect $374 billion less in gains tax revenue over the next decade. TPC figures that while investors would take fewer capital gains, the net revenue increase over the next decade would be $84 billion.
On the corporate front, Clinton would clamp down on so-called "tax-inversions" as well "interest-stripping" --a practice in which the U.S. arm of a multinational makes deductible interest payments to a parent located in a foreign tax haven, to reduce its U.S. taxable earnings. She would also eliminate all the current tax incentives for fossil fuels.
Overall, Clinton's proposal would "slightly decrease incentives to work, save and invest, but only for the top 10% of the income distribution,'' Burman noted. How big a negative impact that would have on the economy is open to debate, he added. Since Clinton's tax cuts for low and middle income families haven't yet been detailed, it's unclear how much she would reduce the overall deficit.
Republican proposals, by contrast, would increase incentives to work and invest, while also swelling the deficit. A larger deficit could drive up interest rates so much that the plans could stimulate the economy in the short term, but harm growth over the long term, Burman observed.