Bernie Sanders' Tax Plan - Who Wins and Who Loses?

In part one of this two-part posting, I looked at the few details that we have from Hillary Clinton's tax plan for America.  Unfortunately, as I noted, she has not fully released her tax plan for lower- and middle-income Americans so, as it stands now, her tax plan looks far more palatable than her competitor, Bernie Sanders, who has "bared his tax soul" for all to see.

Thanks to the Tax Policy Center, we have a full analysis of Mr. Sanders' tax plan.  Mr. Sanders' plan proposes significant increases in federal income, payroll business and estate taxes and adds two large excise tax programs.  This increased revenue will be used to pay for new government programs including free tuition at public post-secondary institutions, a single-payer health care program and paid family and medical leave.  Here is a more detailed breakdown:

1.) Individual Income Taxes:  Here is a table showing how the Sanders' tax plan will impact tax rates and how his proposals compare to current tax rates:

Tax rates for all income levels are increased through the use of a 2.2 percent surtax on all taxable income.  As well, the rate of taxes on capital gains, dividends and other investment income for the top three tax brackets will rise from between 15 and 20 percent to 28 percent.  In addition, net investment income is subject to an additional 3.8 percent surtax if the taxpayer's income exceeds $200,000 or $250,000 for couples.

Here's what will happen to marginal tax rates under the Sanders' plan:

The top marginal tax rate will hit a post-Reagan era high of 54.2 percent but will still be below the 70 percent rate in effect prior to enactment of the Economic Recovery and Tax Act of 1981.

2.) Business Taxes:  The Sanders' tax plan proposes measures that will change the tax treatment of foreign profits earned by U.S. multinationals.  Under the current system, U.S. companies can defer foreign earnings until they repatriate these earnings under a scheme known as "deferral".  Under the Sanders' tax plan, deferrals will be ended.  The Sanders' tax plan will also impact corporate inversions (as discussed in the posting on the Clinton tax plan); companies with central management in the United States will be taxed as U.S. resident corporations meaning that inversions can no longer take place simply by changing where a corporation is chartered.  As well, earnings stripping (also discussed in the posting on the Clinton tax plan) will be less advantageous; the Sanders' tax plan will limit a company's U.S. interest deductions if the company’s net interest expenses for US tax purposes exceed its net interest expenses on consolidated financial statements, the same as the Clinton tax plan.  Pass-through businesses (i.e. sole proprietorships and partnerships) are currently not subject to corporate income taxes and the net income of the business is taxed only when it is declared as ordinary income by its owner.  Since a significant portion of the income received by high-income earners comes from their participation in pass-through businesses, Mr. Sanders' proposals to increase individual income taxes, particularly for the highest income earners, will have a significant impact on income earned by pass-through business owners.

3.) Estate and Gift Taxes:  Increases in the federal estate and gift taxes will be used to finance Mr. Sanders' new health insurance program.  He would restore the 2009 exemption level of $3.5 million and transfers between spouses will remain exempt.  The current 40 percent tax rate would be replaced with a tax rate based on the size of the estate, graduating from 45 percent on an estate valued between $3.5 million and $10 million, rising to 55 percent on an estate valued in excess of $50 million.  Estates valued at more than $500 million would be subjected to a 10 percent surtax.  It is estimated that approximated 10,500 estates would be impacted by these changes in 2017.

4.) Payroll Taxes:  Mr. Sanders proposes a new 6.2 percent payroll tax to be paid by employers to finance his universal Medicare program which would apply to all earnings.  He also proposes a new 0.2 percent payroll tax paid by both employers and employees on wages up to the Social Security taxable maximum.  His plan would also apply the current 12.4 percent Social Security payroll tax to earnings over $250,000 to pay for his expanded Social Security benefits.

5.) Excise taxes:  The Sanders' tax proposal includes new excise taxes on financial transactions and carbon.  The financial transaction tax would tax stock sales at 0.500 percent, bond sales at 0.100 percent and derivative contracts at 0.005 percent.  Revenues from this tax would be used to reduce student loan debt and make post-secondary education at public institutions free.  The carbon tax would start at $15 per ton of carbon dioxide in 2017, phasing up to $73 per ton in 2035 and rising by 5 percent plus the inflation rate in subsequent years as shown on this table:

The carbon tax would be imposed on coal, petroleum, petroleum products and natural gas.  Receipts from the carbon tax would be distributed to taxpayers as a quarterly rebate and would phase out for taxpayers with incomes over $100,000.

Let's summarize.  Here is a table showing how the Sanders' tax plan will impact federal income taxes by income level:

In 2017, the Sanders' tax plan would increase tax burdens by an average of nearly $9000 and reduce after-tax income by approximately 12.4 percent.  The average tax increase for the lowest-income families would be $165 compared to $4700 for middle income families and $45,000 for the top fifth of families.

The Tax Policy Centre estimates that the Sanders' tax policy changes would increase federal tax revenues by $15.337 trillion between 2016 and 2026 with the new 6.2 percent health care payroll tax accounting for 28 percent of the additional receipts.  If these new receipts were used to reduce the federal debt, including reduced interest costs, the debt could be reduced by $18 trillion through to 2026 and $56 trillion through 2036.  However, there is a fly in the ointment; the Sanders' tax plan proposes to use the increased tax receipts to fund new government spending programs, not reduce the federal debt.  According to TPC calculations, the new Medicare for All proposal alone would cost at least $1.38 trillion annually.  Interestingly, despite the high cost of the new plan, calculations show that the Sanders' plan would cost over $6 trillion less than the current health care system over the next ten years and that a typical middle class family would pay just $466 annually to a single-payer program compared to $4955 in premiums and $1318 in deductibles to private health insurance companies.

As we can see, thus far, Mr. Sanders' tax program has a strong social democratic lean to it.  While this offends some Americans who view it as "communist" in its approach, in fact, many of the world's "happiest countries" have strong government-mandated social programs including Norway, Finland, Denmark, Sweden, New Zealand and even Canada where they don't have death panels or set their elderly adrift on ice floes.  The upside to social democracy is that the citizens of these nations never have to worry about healthcare-related bankruptcy, the number one cause of bankruptcy in the United States. 

The Clinton Tax Plan - What We Know So Far

As I have done with the remaining Republican candidates, I wanted to post an article on a comparison of the tax plans for Ms. Clinton and Mr. Sanders.  I have used analyses from the Tax Policy Centre (TPC) at the Brookings Institute and Citizens for Tax Justice (CTJ) as my source material for this posting.  Because of the rather lengthy analysis of the two tax plans, I will split this posting into two parts; you can find Ms. Clinton's tax plan right here and you can find Mr. Sanders' much more detailed tax plan here.

In a nutshell, so far, it looks like Ms. Clinton's tax plan is attempting to appeal to the 99.99999 percent of American voters who don't make hundreds of thousands of dollars every time they give a speech to Corporate America.  Her plan proposes to raise taxes on high-income Americans, reform international tax rules for Corporate America, repeal fossil fuel tax incentives and increase taxes on estates and gifts.  Let's look at a more detailed breakdown:

1.) Individual Income Taxes:  Clinton has proposed a four percent surcharge on adjusted gross incomes (AGI) greater than $5 million or $2.5 million for couples filing separately.  She would also impose a minimum tax of 30 percent on filers with AGI greater than $1 million.  Clinton would also limit the tax benefits from certain deductions to 28 percent, reducing the tax benefits of deductions for taxpayers in the 33 percent and above brackets.  Taxes on capital gains investment income would also change; rather than paying ordinary tax rates on investments held for less than one year (maximum of 43.4 percent) and a top rate of 23.8 percent on assets held longer than one year, Clinton proposes that assets held for less than two years would be taxed at ordinary rates and would reduce by 4 percentage points per year until a minimum top tax rate of 23.8 percent is reached for assets held longer than six years as shown on this table:

Clinton's tax plan will also close down three tax loopholes that are available to everyone but are only used by the wealthiest among us; ending the carried interest loophole that allows investment managers to misclassify their earnings as capital gains, eliminating the reinsurance loophole that allows the super-wealthy to use derivatives that allow them to pay the lower rate on short-term capital gains and eliminate the "Romney Loophole" which allows wealthy families to use retirement accounts to shelter their incomes from the IRS.

Here is a summary of the revenue raised by Hillary Clinton's personal tax plan over a ten year period according to the analysis by Citizens for Tax Justice:

Obviously, the changes that have been announced by the Clinton campaign so far will only impact the ultra wealthy.  Clinton has proposed a tax credit for qualified expenses for elder care that would benefit middle-income families, however, her campaign states that it will release details on its program to cut taxes for lower- and middle-income families later in the campaign.

2.) Business Taxes:  Rather than cutting the headline corporate income tax rate that Corporate America rarely pays, Ms. Clinton has proposed a program that will achieve specific goals.  First, she will discourage multinational companies from using inversions to lower or avoid U.S. taxes by lowering the 80 percent U.S. shareholder ownership rate to 50 percent (i.e. the company must be at least 50 percent foreign-owned to be classified as foreign in the eyes of the IRS rather than the current 20 percent).  She will prevent "earnings stripping" by limiting a company's U.S. interest deductions if the company's share of net interest expenses for U.S. tax purposed exceeds its share on its financial statements.  Her plan will also levy an "exit tax" on multinational companies that leave the United States before recognized earnings are subjected to U.S. taxes.  On the financial sector side, Ms. Clinton daringly proposes to bite the hand that feeds the Clinton family speech factory by imposing a risk fee on the largest financial institutions and reform the performance-based tax deductions that are available to the executives of publicly-traded companies.  The fossil fuel industry would also have their tax subsidies eliminated including expensing of intangible drilling costs and percentage depletion.

The Clinton campaign states that it will announce further tax relief for small businesses later in the campaign.

3.) Estate and Gift Taxes:  In the 2015 tax year, the basic exclusion for the estate tax is $5,450,000 or twice that amount for couples and the top tax rate is 40 percent.  Clinton proposes to lower the exclusion to $3,500,000 and raise the top tax rate to 45 percent, bringing the estate tax back to its 2009 parameters.  Clinton would also establish an unindexed lifetime gift tax exemption of $1 million.

Let's summarize.  Clinton's proposals would increase revenues between 2016 and 2026 as follows:

Cap on wealthy deductions and exclusions: $406 billion

4 percent surtax on high income Americans: $126 billion

30 percent minimum tax: $119 billion

Capital gains tax: $84 billion

Other individual income tax changes: $445 billion

Corporate income tax changes: $136 billion

Estate tax changes: $161 billion

Here is a table summarizing how Hillary Clinton's tax plan will impact revenues, the deficit and the debt over the next two decades:

The Tax Policy Center estimates that, including the interest savings from reducing the debt, Clinton's proposals will reduce the debt by $1.2 trillion over the next decade and increase revenues by $1.1 trillion.  Her tax increases will have little effect on those making less than $300,000 with tax filers in the top quintile shouldering 94.2 percent of the net tax increase with an average federal tax increase of $4527.  What is really important to keep in mind is that Ms. Clinton's unrevealed tax plan for lower- and middle-class Americans will likely cut into revenues and increase spending, unfortunately, we don't know how big that negative impact will be.  Once we have further details, I will add the information to this posting.

As I noted above, to keep the comparison of the two Democratic candidates tax plan to a readable length, you can find the analysis of Mr. Sanders' comprehensive tax plan by clicking on this link.

Comparing the GOP Tax Plans - Who Benefits and Who Loses?

Updated April 2016

A very interesting analysis by Citizens for Tax Justice compares the tax plans for each of the three key remaining GOP presidential candidates Ted Cruz and Donald Trump.  All of these plans will contribute to the federal debt which is already at crippling levels.

Let's open by looking at the most recent Budget and Economic Outlook for the period from 2016 to 2026 from the non-partisan Congressional Budget Office for some background information on the current state of America's fiscal situation.  While the Obama Administration and Congress are congratulating themselves for seeing the size of the deficit decline for the past six years as shown on this graph from FRED:

...the federal fiscal situation is far from healthy with the total federal debt at $19.125 trillion, up by nearly $8.5 trillion since Barack Obama took office.   The CBO's analysis shows that the federal deficit for 2016 will rise to $544 billion, an increase of $105 billion over fiscal 2015.  This means that the deficit for 2016 will be 2.9 percent of GDP.  Why will the deficit grow in 2016?  The CBO analysis states that the increase is largely attributable the legislation that has been enacted since August 2015; this legislation retroactively extends the provisions that reduce corporate and individual income taxes.

Not only is the deficit increasing in fiscal 2016, the CBO analysis shows that the growth in spending will outpace the growth in tax revenues over the next decade.  The budget deficit increases are modest to fiscal 2018 but grow sharply by 2026, rising to $1.4 trillion, which adds up to $9.4 trillion over the decade between 2016 and 2026.  As a percentage of GDP, the federal deficit will rise from 2.9 percent of GDP in 2018 to 4.9 percent in 2026.  This would push the debt held by the public up to 86 percent of GDP from its current level of 76 percent of GDP as shown on this graphic:

Keep in mind that part of the reason that the growth in the federal debt and deficit has been so modest over the past three or four years is the prolonged period of ultra-low interest rates on the outstanding marketable federal debt, a situation that will likely change over the coming decade.  As well, the CBO analysis does not allow for a recession which would reduce federal tax revenues and increase federal spending as Washington would likely be forced into stimulus spending.  Even with those two unusual circumstances not accounted for in their analysis, the CBO calculates that three decades from now, the public debt would reach a whopping 155 percent of GDP if current laws remain in place.

With that data in mind, let's look at CTJ's analysis of the Cruz, Rubio and Trump tax plans.  The analysis assumes that half of the tax changes for each of the presidential candidates would be paid for by cuts in spending and half by an across-the-board income tax increase, similar to what happened after the 1981 Ronald Reagan promised tax cuts became clearly unaffordable.

Here are the highlights of the tax plans:

1.) Ted Cruz:  Mr. Cruz's tax plan would cut taxes by $13.9 trillion over the next ten years by reducing personal income tax and replacing corporate income tax, estate tax and patrol tax with a 16 percent federal value-added tax (VAT).  This plan is set to benefit higher income people (i.e. the one percent) who would see an average tax cut of $435,854 while the bottom 20 percent would see their taxes rise by $3,161 and the middle 20 percent seeing their taxes rise by $1,943.  Essentially, only 20 percent of taxpayers would receive any benefit from the Cruz tax plan.

2.) Donald Trump:  Mr. Trump's tax plan would cut taxes by $12 trillion over the next ten years by reducing marginal tax rates and increasing the standard deduction.  While the Trump tax plan reduces taxes for all income groups, it is skewed to the rich with the top one percent seeing their taxes reduced by an average of $227,225 compared to only $250 for the bottom 20 percent and $2,571 for the middle 20 percent.  Again, when the impact of future spending cuts and tax increases are included in the analysis, only the top 5 percent of taxpayers would see a net benefit.

Keeping in mind that when the impact of the cuts in tax revenue have to be paid for through reductions in spending, the net impact of the tax cuts that I've noted above are significantly reduced.  In the case of the lowest 20 percent, the impact of "plan and pay-fors" reduces the Cruz income reduction from -$3,161 to -$6,234 and the Trump income gain from +$250 to -$2,541.

From the CTJ analysis, we can see that the two front-runners in the GOP race certainly know how to look after their wealthy peers despite their protestations that they are in it for "the little guy".  With the Congressional Budget Office's analysis of the coming decade looking rather dire, it really appears that, as Ronald Reagan found out in 1981, all of these campaign promises of tax cuts have to be paid for by cutting spending on government services, an issue that could prove to be problematic during the upcoming recession (whenever that may be...and it will be).