Hillary Clinton Tax and Economic Plan – Part 1

Like I promised in the Donald Trump presidency breakdown (part 1 and part 2), I said I would keep it fair and look at Hillary Clinton’s platform as well. I put it off a few days knowing that, unlike Trump’s piecemeal platform, she would have a fully-rounded and comprehensive plan. And boy was I right – too right. She has a stance and idea for every issue that you ever discussed in passing at the pub with your friends, or over the water cooler at work, or in the privacy of your own home. Even things you didn’t know were issues for the Presidency, like Alzheimer’s Disease and Autism (not to dismiss these, but I always thought they were the job for research and medicine, not political footballing). In total, she has 37 different issues she has pinpointed and each has a short 300 to 500-word narrative.

The Clinton breakdown will follow the same pace as Trump’s. First I will discuss the tax ideas of Clinton; then, in the next article, I will discuss her over-arching economic plan. One thing I have to applaud both candidates for is their use of the website. Clinton has a very streamlined page, following the format of many social media sites – a useful link-filled and permanent header, a muted video about Trump and then a collection of related articles and media just under. Each one of her landing pages has her text and then a few trackbacks, related articles, and then social sharing buttons. It truly markets to the people that are likely to frequent her page – young Millennials.

For Trump, his site is blockier. Everything has a place. His landing pages are text-heavy, but still use easily read bullet points. The right side of his pages has a toolbar for quickly sorting through links. I will say, I did get lost trying to find one of his press releases because they weren’t labeled incredibly well. I ended up giving up and just using my internet history to find the page I was looking for. Overall though, his site is very easily navigable and relatable to the type of voters likely to frequent his page – older, traditionalist Republicans.

Well, without further hesitation, let’s get into the Clinton tax plan!

Clinton Tax Plan

Over the next 10 years, Clinton plans to raise government revenues by $1.1Trillion. Her goal is to do this by only increasing the taxes on those making more than $300,000 a year. Specifically, she wants add a 4% surcharge on any income over $5Million as well as raise the Alternative Minimum Tax (AMT) to a 30% effective rate on anybody who makes over $1Million a year.

Her plan also seeks to shake up the capital gains (much to my chagrin), business taxes, and estate taxes. For income taxes, she seeks to increase the brackets and the marginal rates for top-earners. The types of proposals and reforms she’s advocating for are far larger than Trump’s proposals. I only mention that because Trump is “advocating for the largest tax reform since Reagan”.

Clinton Tax Plan for Individuals

On top of the 4% surcharge for those making more than $5Million yearly, and the 30% AMT, Clinton’s major change comes on investment income. To wit, she wishes to change the entire game. Currently, we differentiate short versus long-term gains by saying any capital asset held for a year or longer is a long term gain and will be taxed at 23% (plus a 3.8% investment surtax if applicable under the Affordable Care Act). Anything held for less than a year is a short term gain and taxed as regular income. Clinton wishes to increase length of the short term window from one to two years, and then tier the rates. The rates would decrease by 4% for six years until finally capping at the current 23%. Thus the new true long term capital gain would be for any asset held longer than six years. For someone like me, who is financially savvy and manages their own portfolio, this has serious ramifications because six years is an incredibly long time to hold any particular stock – whether you’re a dividend or value investor.

Like Trump, Clinton wishes to treat carried interest as ordinary income. The difference is that under Trump it would likely be taxed at 15%. Under Clinton, using just the statistics of people who tend to get the carried interest, it would be taxed at the 43.4% (the top 39.6% plus the 3.8% surcharge) income bracket.

The final major reform for income taxes is the use of tax deferred retirement accounts. These are your personal and work IRA’s. Clinton is seeking to disallow any contributions tax favored accounts once the sum of all accounts reaches the maximum annuity for defined benefit plans. That’s a bunch of special language to say that once the sum of all retirement accounts hit about $3.4Million, you can no longer use the tax advantages. You can still save money; it just will be after tax money placed into accounts whose returns will also be taxed. My guess is that she’s trying to spur consumption by reducing the incentive to save for the top 5% in the nation, as well as create one more avenue to make the “rich pay their fair share.” I also reckon this would be highly contested and, if passed, have some serious unintended consequences.

Clinton Tax Plan for your Estate

Clinton just wants our current estate tax laws to go back to 2009. She would reduce the estate allowance back down to $3.5Million ($7Million for a couple), and increase the rate back to 45%.

She also wishes to reduce the lifetime gift tax allowance from $5.34Million down to $1Million. The yearly one has no mention and, presumably, would stay at $14,000 a year.

Clinton Tax Plan on Business

A key point for the Clinton tax plan is the methodology for dealing with corporate tax inversions. A tax inversion is where Company A (a US Company) buys shares to merge with Company B (let’s say they’re an Irish company), and thus become one. The U.S. company would then move their headquarters from Anywhere, USA to Anywhere, Ireland and thus be subject to Ireland’s much lower corporate tax rate. Clinton seeks to lower the standard for what it takes to be an inversion attempt. Right now, a U.S. company has to be 80% of the foreign shares; Clinton would reduce that to 50%. Sounds kinda wonky on its face, right? Well, Clinton also wants to institute some serious tax penalties for doing this. An exit tax is the largest penalty they would face. Details haven’t been supplied, but I would venture to guess that it would be some percent of average gross revenues over the last few years.

Finally, she wants to mitigate earnings stripping. This is rather complex topic, so I won’t go too far into the weeds. However, it’s basically just a play on how we account for earnings. Firm A, is in some tax haven and they start a U.S. affiliate company. Generally, you would think the U.S. affiliate would take their after tax profits and ship some to the parent company. That would be a dividend payment. However, rather than make a dividend payment, the U.S. affiliate makes an interest payment by structuring it differently. Because it’s now a cost to do business, it becomes a tax deduction and lowers the U.S. affiliates taxable income. That “difference” becomes taxable income for the parent company at the tax haven levels and thus, the parent company retains more of their earnings. Clinton seeks to reduce those deductions. By doing these three things – reduce the deductions for earning stripping, lowering the inversion test, and implementing an exit tax – Clinton is seeking to reduce the incentives to offshore a business for purely tax based purposes. It is worth noting that Obama has tried to mitigate earnings stripping twice, and both times it was rejected in Congress.

Another interesting tax Clinton has come up with, and one you don’t hear much about, is a tax on high frequency (usually algorithm based) traders. This isn’t so much a revenue tax as it is a ‘let’s tax bad behavior’ type of tax. This would tax investment funds that use, primarily, high frequency trading. This type of trading places many, many trades with most never being filled. It bogs down the system, it plays the odds in a way that you and I can’t play, and it increases the implicit advantage of Wall Street over Main Street. It can also cause some unnecessary market drops. Just google “flash crash” to get a feel for what I’m talking about. No details have been released on what the tax would be.

To stay in the topic of finance though, she wants to impose a “risk fee” on the financial sector. Again, likely trying to curb bad behavior. She also wants to curb performance based compensation for top corporate executives. Details on both are currently still in the pipeline and not available.

From there, Clinton seeks to reduce tax breaks for fossil fuels and increase tax breaks for companies who hire apprentices (this goes with her manufacturing ideas), do profit share with all employees and not just executives, as well as give breaks to companies who invest in distressed communities or infrastructure. The details of any of these are all still in the idea stage.

Conclusion

I don’t agree with all facets of the Clinton tax plan, and I even stand to lose money from certain portions of it. However, I believe she seems to have a far better idea of what the role of government is over Trump. Taxes are simply behavior modifiers. The other benefit to Clinton’s tax plan over Trump is that she has a quantifiable way to pay for the improvements she wants done as president. Trump’s plan has major tax cuts, which is fine for what he wants to do for business. But socially, he has many plans that will cost money, yet he has vouched to not do deficit spending. Clinton has many goals she wants attained but, with a potential bump of over $1Trillion over 10 years, actually have a chance of being financed internally. She does have a few holes in her plan though with key parts not having been fleshed out yet.

Readers, how do you feel about the Clinton tax plan? Do you think it is better or worse than Trump’s? Discuss in the comments below. Be sure to like Cash Flow Celt on Facebook, and, if you think this is a great review, don’t be afraid to share it with your friends as well!

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I'm just a local business and finance nerd looking to help people get educated about small business, marketing, and personal finance! I write about anything and everything that I can tie into those themes. I'm also Central Florida's only Kilted Realtor, so I write about Real Estate too! Check out my About Me page to see the origins of Cash Flow Celt.

2 Responses

Two questions: First, what is the likelihood that either candidate will actually be able to get any of these tax proposals into IRS code? Second, since the majority of taxes you discuss relate to corporations, stock traders and the extremely wealthy, what role do you think “tax plans” have in getting a candidates elected (in other words, does the average voter care about this?)? Thanks.

Excellent question, and an astute observation on the promulgating process.

For Clinton, I find it highly unlikely. I discuss it in Part 2 a little bit. For starters, the Wall Street taxes are taxes on use basically – it’s simply a revenue generator and Republicans tend to have issues with those types of taxes.

I think her 4% surcharge might be manageable, because it’s such a small percentage of the population it would affect – and it’s a rather disliked population at that. However, the increased AMT, I see getting struck down without discussion. It’s DOA.

For Trump, I think he stands a FAR better chance to get his approved. It’s basically a tax break for everyone, everywhere. Those are politically friendly. Will they be better the country? I don’t think so, but I think he could get them passed.

To the second portion, about voters. It relates to both candidates, albeit differently. Trump is purely from a financial perspective. People will see it and say, “Wait, I’ll pay markedly less under Trump? WIN!”. Under Clinton, she has many punitive taxes — the risk fee, the algorithm trader fee, the rich surcharge, the increased AMT. Punitive taxes are, historically, one of the most disliked types of taxes because they don’t modify behavior and therefore are seen as government punishment and an unfair business practice. Admittedly, I do think she crosses into a few grey areas when it comes to the role of the government.

One thing that everyone needs to consider with Hillary though is her new capital gains brackets. A lot of people will be affected by it. I might even say anyone with an IRA. Under the new brackets, I wouldn’t be surprised to see managing companies increase their fees which affects everyone’s bottom line.