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August Commentary: The Tax Plans of Donald Trump and Hillary Clinton

After the longest election cycle in modern history, we are finally entering the stretch run. Less than 100 days separate us from knowing who the next President of the United States is going to be. Truth is, either way, history will be made. A victory by Secretary Hillary Clinton means the first time that we all get to say "Madam President". A win by Donald Trump will, for the first time since Dwight Eisenhower was elected more than 60 years ago, put a man in the Oval Office who has never held elected office.


This election has been polarizing, if nothing else. Social media has been set aflame by constant political rhetoric, and the old adage of not talking politics has been all but retired. As all of us prepare to make our choice in November, it is worthwhile to spend some time examining the policy differences between the two candidates of the major political parties. Keep in mind, my goal here is not to endorse either candidate. It is far from my place to tell you how to use your vote. Rather, it is my goal to help you understand the financial realities that will be born from each candidate's victory.


Let's start with a topic near and dear to all of our hearts...taxes! Whether personal income, capital gains, corporate tax or estate tax, there is no question that Donald Trump's plan will call for you to pay less of it. In fact, some Americans (those making under $25,000 as individuals or $50,000 for married filing jointly) won't pay any income taxes at all. In total, Mr. Trump calls for a total of four personal tax brackets, topping out at 25% for married couples filing jointly with income over  $300,000, and the same bracket for individuals making more than $150,000.


The wealthiest among us have seen even deeper tax reductions with the elimination of the 3.8% Net Investment Income Tax passed as part of the Affordable Care Act and the reduction of short-term capital gains rates, from a high of 39.6% down to a high of 20%. Long-term capital gains rates remain the same for most Americans, though they are lowered for lower income tax brackets.


One of the largest areas of difference between the two plans is in the treatment of estate tax, otherwise known as "the death tax". In the current system, the top federal tax rate is 40% and only comes into play when the decedent's estate crosses the $5.45M threshold (twice that for married couples), which is currently less than 0.5% of all estates in the United States. In a coup for the wealthiest Americans, Donald Trump would eliminate the estate tax altogether, which has not been the case since the tax was enacted in 1916, save 2010 when a Congressional stalemate (I know, shocking) caused the previous system to lapse.


On the other end of the spectrum is Hillary Clinton, who would instead seethe threshold lowered to $3.5M (again, twice that for married couples), taking us back to 2009 levels. This would most certainly increase the number of estates coming in above the threshold but would still keep more than 99% of Americans safe from owing federal estate tax.


Other than that, Secretary Clinton would only very marginally change the current system of income taxation, keeping seven brackets that range from 10% to 39.6%. She does, however, call for a 4% "surcharge" on the highest of high-income earners, those with annual incomes of $5M or more, bringing their income tax bracket up 43.6%.


Additionally, she has proposed enacting The Buffet Rule, which stems from the musings of billionaire Warren Buffet, who famously said that he believed it was wrong for rich people like himself to pay less in federal taxes, as a percentage of their income. While President Obama toyed with the idea of proposing this rule in 2012, Hillary Clinton is making it part of her plan in the form of a 30% minimum tax on taxpayers with an adjusted gross income of $1M.


In an effort to even the playing field from a different direction, Secretary Clinton has also proposed higher capital gains taxes on high income earners (again, $5M adjusted gross income and above), raising rates to anywhere from 27.8% to 47.4%, depending on the length an investment has been held. In what might seem like an obvious comment at this point, Donald Trump does not have anything in his plans similar to the Buffet Rule or higher capital gains rates (in fact he would drop rates all the way around to between 0% and 20%).


As for businesses, we don't actually know too much about Secretary Clinton's specific plan other than that she plans to increase taxes on large financial institutions and crack down on loopholes that provide tax avoidance strategies. For small businesses, she plans to reduce taxes of companies between 1 and 5 employees and provide greater access to capital for these enterprises.


Donald Trump proposes reducing the business tax rate from 35% to 15% for all businesses, big and small, including unincorporated or pass through entities (like an LLC or S-Corp) by making them eligible for the 15% business tax rate. Donald Trump also proposes a major effort to bring back trillions of dollars that have been stashed overseas, by offering a one-time 10% tax rate on all dollars brought back by US companies.


So what does any of this mean? Truthfully, it is in many ways same old, same old for the Republican and Democratic parties. The Democrats believe in a more robust role for the federal government, in healthcare, education, protection and programs for the underserved, and therefore higher taxes. The Republicans believe in a more limited government, with a high level of state individuality when it comes to things like healthcare, education and programs for the underserved. They believe in keeping earned income in the pockets of the earner and lower tax burdens. It is no surprise then that Hillary Clinton's plan would, according to the Tax Policy Center, raises federal tax revenue by $1.1 trillion over the next decade, while Donald Trump's plan would reduce government revenue by $9 to $12 trillion dollars over the same time frame.


Both plans focus the majority of their changes on the wealthiest Americans. Secretary Clinton's plan would raise taxes on the one-tenth of one percent of income earners (those with income greater than $3.8 million), who would see an average tax increase of $520,000 or 7.6%. The next 4.9% of top earners would see their taxes increase by between 0.8% and 1.7%, while the bottom 95% would see little or no difference. Mr. Trump, on the other hand, would give that same top one-tenth of one percent a 19% reduction, an average of $1.3 million dollars, the rest of the top 1% an average tax cut of 17.5%. The bottom 98% of earners would receive a a cut of between 5% and 8%.


Which is better? Honestly, that is best left to the eyes of the beholder. Different people, in different economic, social and political circumstances might reasonably differ in their answers to that question. Other than the normal partisan fodder, there are criticisms of both sides. Hillary Clinton's plan shows definitively more government spending and more regulation for Wall Street. Donald Trump's plan could bring inequality to an all-time high and could create unprecedented fear and disruption.


Finding a bipartisan study was difficult. The closest things is a recent study, The Fiscal Times engaged leading economists, with both Republican and Democratic leanings, and asked them to rate each plan based on four categories: legislative feasibility, economic growth, fiscal responsibility and impact on tax payers. Hillary Clinton's plan was viewed significantly better in terms of fiscal responsibility and impact on tax payers, while her plan was given a slight edge in terms of legislative feasibility. Donald Trump's plan came out on top, albeit slightly, in terms of economic growth. 


So where does it leave us? Like everything else in this election, we must wait and see. It would be disingenuous to believe that the next President of the United States has an unimpeded right to put their plan forward. First, we know that both plans will change several times over before anything is enacted...they always do. And more importantly, we have no idea what both chambers of Congress will look like come January 2017. If the current Congress is any indication, it might be incredibly difficult for either candidate to get their plan through. That is why it is so important to know what you are bargaining for at the top of each ticket and in every down ballot race.


The purpose of this article is to provide factual, unbiased information based on third-party research and independent data. It is in no way meant to express a political opinion or act as an endorsement for a specific political party or candidate. If any reader perceives a political opinion, it is without intention, and does not reflect the opinion of American Portfolios Financial Services, American Portfolios Advisors, or any party other than the writer, Ari M. Teplitz.



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