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.