The election analysis provided by Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any candidate or political party.
On Capitol Hill, both parties seem to agree: The tax code needs an overhaul. They just have totally different ideas about what kind of system should replace it.
The last major reform to the tax code was in 1986. That doesn’t mean there haven’t been changes since then. In fact, lawmakers have amended the code thousands of times—resulting in the complicated and confusing system we have today.
So what are Hillary Clinton and Donald Trump proposing to do about it? They’re proposing a lot, but beware: tax reform is never easy. Presidents can call for tax changes, but the nitty gritty of writing tax law is the responsibility of Congress. And with Congress likely to remain closely divided along party lines, a tax overhaul, if it occurs at all, will almost certainly look quite different from the candidates’ initial proposals.
But the president has the ability to shape debate on key issues like tax reform, so it’s worth comparing what those proposals look like. Here’s how the two candidates’ plans stack up:
Income tax rates, investment taxes and deductions
- Income taxes: A centerpiece of Clinton’s tax reform plan is what she calls a “Fair Share Surcharge,” which would impose an additional 4% tax on taxpayers earning more than $5 million per year. That would make for a top marginal tax rate of 43.6%. Added to that could be the existing Net Investment Income Tax, which imposes an additional 3.8% tax on investment income for taxpayers whose modified adjusted gross income exceeds $200,000 ($250,000 for couples), for a total top rate of 47.4%. She has also endorsed the so-called “Buffett Rule,” which ensures that millionaires pay at least a 30% effective tax rate.
The proposal is named for investor Warren Buffett, who once famously noted that he pays a lower tax rate than his secretary. The proposal addresses the fact that many of the wealthiest filers see the majority of their income from capital gains and dividends, which are taxed at a lower rate than ordinary income.
Trump’s plan mirrors a proposal put forward by House Republicans, which would reduce the number of tax brackets from seven to three: 12%, 25% and 33%. Trump would also repeal the Net Investment Income Tax.
- Investment taxes: Clinton has proposed taxing capital gains on a sliding scale, with the rate dropping the longer an investor holds an asset. The goal is to encourage investors to focus more on long-term investments. Trump hasn’t released a specific proposal on capital gains taxes.
- Deductions: There is more common ground between the two candidates when it comes to deductions. While neither has put out a detailed plan, both have said publicly that they would preserve the deductions for mortgage interest and charitable contributions. Clinton, however, has supported a proposal put forward in recent years by President Barack Obama that would cap the value of itemized deductions at 28%.
Clinton has also proposed a small tax on trades that is designed to discourage high-volume trading. Other countries have adopted this kind of financial transaction tax, but the idea has little support in Washington. Several proposals for such a tax are floating around Congress, but the odds of one passing are small in a narrowly divided Congress.
The estate tax is one part of the code that lawmakers have reformed relatively recently. After 2010, when there was no estate tax at all for a year, a compromise was forged in Washington that set the exemption amount at $5 million and the tax rate on estates worth more than $5 million at 35%. Those levels were made permanent in 2013. The exemption amount is indexed for inflation. In 2016, it is $5.45 million.
Clinton has proposed returning the estate tax to its 2009 levels: a $3.5 million exemption, with a 45% tax rate.
Trump has proposed repealing the estate tax—which many Republicans refer to as the “death tax.” It’s been a core element of most Republican tax reform proposals for years.
The tax issue where Republicans and Democrats share the most common ground is corporate taxes. The U.S. has the highest corporate tax rate in the world, though there are so many incentives in the tax code that many businesses do not pay anywhere near the top rate. Still, there is broad agreement that reforming the corporate tax code would strengthen the country’s competitiveness.
Clinton hasn’t proposed a corporate tax rate, but has called generally for taking steps to lower corporate taxes. Trump’s plan is to cut the corporate tax rate to 15%.
Hurdles in Congress?
No matter who wins the White House, tax reform remains one of the most politically complex and challenging issues facing Congress. It’s a top priority for House Speaker Paul Ryan, R-Wis., but even unifying House Republicans behind a reform plan has proven challenging so far. While we expect lawmakers to take a run at tax reform in 2017, we continue to think success is a real long shot.
Investors should keep that in mind when analyzing the presidential candidates’ tax overhaul proposals. If and when tax reform starts moving in Congress, it’s likely to look a lot different than either Trump or Clinton proposes.
What you can do next
- If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the political noise and focus on your long-term goals. Want to talk about your portfolio? Call our investment professionals at 800-355-2162.
- Watch Schwab experts discuss other market and economic topics in the Schwab Market Snapshot.