Editorial: Best tax plans raise revenue and growth. A look at the candidates.
Taxes have not yet taken center stage in the 2016 presidential campaign, but what the candidates intend to do to reform the tax code will have a major impact on their effectiveness in raising incomes and creating jobs — two topics that are dominating the discussions.
America’s recovery remains tepid largely because of tax policies that work against economic growth. An ideal tax plan would raise the money necessary to fund government, while doing the minimal damage to economic output.
During the Obama years, taxes have crept steadily up on high income earners as the president attempts to use the code as a redistributive tool to close the income gap between rich and poor. It hasn’t worked. A soaring stock market and rebounding real estate market have boosted the wealthy, despite the additional taxes.
Meanwhile, the disincentives to invest and take risks have kept money out of the investment markets, where it should be stimulating economic activity and creating jobs.
Looking at the tax plans offered by the remaining candidates in the presidential contest, there are some interesting ideas that should work to boost growth — and some that would do just the opposite.
For individual taxpayers, every Republican candidate is proposing to cut rates, including on the highest income earners, some a lot more than others. And for the most part, they would settle on three to four brackets, down from the current seven.
Marco Rubio, for example, is proposing brackets of 15 percent, 25 percent and 35 percent, not much of a deviation from the current range, with its top rate of 39.6 percent. But he would eliminate most taxes on investment income, in hopes of coaxing more money into the economy.
Donald Trump seeks the biggest reduction in individual rates, with a bottom bracket of 0 percent and a top one of 25 percent.
Ted Cruz is pitching a 10 percent flat tax, with sharp limits on deductions and credits.
John Kasich and Jeb Bush have similar proposals. Both would lower the top individual rate to 28 percent, and like all GOP candidates, would sharply reduce the 28 percent capital gains tax, which should draw investment dollars into the economy. Rubio has among the most interesting capital gains proposals — he’d get rid of it altogether. But investors would have to calculate the value of all their holdings on a specific date and base their tax obligation on that value when they sell. Future growth would be tax exempt.
All of the Republican contenders would also either lower or end the estate tax.
For business, the focus is the corporate income tax, which at 35 percent stands at the highest of the industrialized nations. Bush would cut it to 20 percent, Kasich to 25 percent and Trump to 15 percent.
Cruz has the most radical proposal for taxing business: He’d end the corporate income tax altogether and replace it with a 16 percent business transfer tax on all capital income and labor payments.
The candidates are united in their commitment to get rid of the double tax on overseas earnings to repatriate up to $2 trillion that could be invested in the United States, and to stem the rush of U.S. companies to establish foreign headquarters.
For Democrats Hillary Clinton and Bernie Sanders, the focus of their proposals is to raise taxes in hopes of generating more revenue from higher-income earners.
Sanders would raise all rates by 2.2 percent, and establish a top bracket of 52 percent. He would tax capital gains as ordinary income for incomes above $250,000 and raise the top estate tax to 65 percent from 40 percent, while lowering the exclusion to $3.5 million from $5.45 million. That would increase the number of inherited small business impacted by the tax.
Clinton would add a 4 percent surtax on incomes above $5 million a year for both income taxes and capital gains and increase the estate tax to 45 percent while also lowering the exclusion to $3.5 million.
Again, the goal of taxation is to broadly and fairly raise revenues without hurting growth. The plans differ widely by that measure.
For example, the American Tax Foundation calculates Cruz’s proposal would reduce taxes by $3.6 trillion over 10 years, but only cut revenue by $768 billion due to the increased economic growth it would stimulate. Trump’s proposals would cut taxes by $12 trillion, while reducing revenue by $10.14 trillion. Bush would cut taxes by $3.6 trillion, with an actual impact on revenues of $1.6 trillion.
Meanwhile, the foundation calculates Sanders’ plan would increase taxes by $13.6 trillion, but raise revenues by only $9.8 trillion because of its negative impact on growth. Clinton’s plan would raise taxes by $498 billion, but revenues by just $191 billion.
Getting taxation right is a critical piece of the economic puzzle. Tax cuts must be matched by spending restraint, and should not increase the deficit.
The plans so far mostly focus on rates. A comprehensive plan must also zero in on the code’s complexity. With taxes, simpler is better.
First of six
This is the first in an occasional series examining issues in the upcoming presidential primary election.