As of Labor Day, September 5, there were only 64 days until Election Day. However, early voting in Tennessee starts Wednesday, October 19, just 44 days after Labor Day weekend signals the end of summer. There are many issues surrounding the presidential election this year – immigration; ISIS; gun control; education; foreign policy regarding China, Israel, and Iran; and the list goes on. One area that concerns and affects us all is tax policy. In general, candidates Trump and Clinton seem to be pulling the party line, with Trump coalescing around traditional Republican policies and Clinton mirroring the policies that have guided President Obama’s budget requests for several years. Alas, there are several big differences that, given the upcoming election is just eight weeks away, we should review.
Late last year, Trump proposed lowering the income tax brackets from the current seven (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) to four. On August 8, Trump amended his proposal to just three tax brackets (12%, 25%, and 33%). These are the same brackets proposed by Paul Ryan and the House Republicans in June.
Clinton has not proposed any changes to the current seven tax brackets but has two proposals that would increase income taxes for the affluent. One proposal is the “Buffett Rule.” In June 2011, Warren Buffett wrote in an opinion piece that the total tax he paid, as a percentage of his taxable income, was lower than that paid by the other 20 people in his office. The primary explanation he offered for this was that the ultra-wealthy receive a large percentage of their income from capital gains and qualified dividends, which are taxed at more favorable (lower) rates than wages and other ordinary income items. Thus, Clinton has proposed a minimum tax of 30% on income exceeding $1 million. In addition, Clinton supports a 4% “fair share surcharge” on tax payers with adjusted gross income exceeding $5 million, essentially creating a new 43.6 tax bracket for those at the highest level.
For the vast majority of tax payers, under Trump’s proposal with just three tax brackets, the Tax Foundation’s evaluation suggests after-tax income would increase for the bottom 80% of tax payers in the range of 0.2% to 0.5%. Clinton has said she will not raise taxes for the middle class and her current proposals have little impact on the bottom 95% of tax payers.
Estate tax revenue at the Federal level has fallen in recent years. (In addition, beginning in 2016, Tennessee inheritance tax was eliminated.) The Federal government’s estate tax share of total revenue is down from about 1 percent in 1990 to 0.6% in 2015. This is partially due to the fact that the first $10.86 million of a married couple’s estate was exempt from the estate tax in 2015, and because of other special exemptions from the estate tax, fewer than the wealthiest two of every 1,000 estates nationwide owed any estate tax in 2015.
Trump has proposed to eliminate federal estate taxes. Clinton has proposed to lower the exemption amount to $7 million for a married couple and also increase the estate tax rate from 40% to 45%.
Likelihood of Change
The bottom line is that Trump is pushing proposals that offer drops in individual and corporate tax rates, which would benefit the nation’s wealthiest tax payers. This is a long-standing Republican platform. Clinton has proposed to raise taxes for the wealthiest households to pay for traditional Democratic proposals such as expanding access to higher education. However, writing tax law and tax reform is the job of the Congress. A recent survey of tax professionals showed that 77% believe tax reform would pass under a Republican president and only 33% expect tax reform to pass if the next President is a Democrat. Obviously, with both the U.S. House and Senate under a Republican majority, one would expect a greater likelihood of reform with a Republican president in office, if the Republican majority holds.
We hope you’ve found this review to be educational and helpful. As we always emphasize, it is our job as financial advisors to assist you. Thank you very much for the trust and confidence you’ve placed in our firm.
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DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.