For a tax change, the structure and financing are critical in order to achieve growth. Low tax rates usually encourage individuals to work, save, and invest, but where the tax cuts are not financed by immediate spending cuts, chances are there that such steps would lead to an increase in federal budget deficit, and the same will reduce national savings and lead to an increase in interest rates. In such circumstances, the net impact on growth is uncertain.1
The effect of tax rate cuts on budget deficits can be eliminated by broadening the tax base, but at the same time, the changes may reduce the impact on labour supply, saving, and investment and thus reduce the direct impact on growth. Such measures also reallocate resources across sectors toward their highest value economic use, resulting in increased efficiency and potentially raising the overall size of the economy. In this background it becomes important to study and analyse the tax proposals being debated amongst the US politicians.
It may be noted that the elections provide an opportunity to people to choose their representatives and leaders for various political offices, yet the elections bring changes having far reaching consequences. The intended economics changes being proposed by the major political parties are generally reflected in their manifestoes.2 See for example, currently the presidential elections in the US are in the offing and each candidate is proposing that if elected, he would try to get Congress to reshape policies, more particularly, the economic and tax policies in his way.
In this background, an effort has been made to examine that how Hillary Clinton and Donald Trump are going to reshape the American tax policy. The changes in the field of taxes being proposed by Trump are evident from his speeches, statements and presentations. His proposals include the following:
I. Middle class Americans will get a small tax cut;
II. Wealthy Americans and businessmen will get a huge tax cut;
The experts estimate that impact of such proposals would bring in:
a. The budget deficit which will widen substantially;3 and
b. There will be lighter tax regulations giving advantage to wealthy Americans.
On the other hand, the agenda of the Clinton stands as under:
a) Wealthy Americans will pay higher taxes;
b) Businesses will face tax rules by making tax regulations less advantageous for those who want to relocate their businesses overseas;
c) The revenue so collected will be allocated to the fund so constituted;4
These proposals show that in a nutshell how in future American economic policy is going to be shaped. All these policy points are being debated in the ongoing presidential election campaign.
One can argue that the campaign’s agenda is far away from real politics as slogans can never be transformed into reality, and the selected policy items being discussed by the candidates show a lack of clarity and slogan mongering. Nevertheless, these proposals show long- and short-range goals and vision of these leaders.5 All this indicates that what goals and achievements are to be achieved when a particular candidate wins.
The economic policy agenda of these candidates being presented indicates that Trump intends to decrease the existing 39.6 percent tax rate applicable on income over $467000 (for a married couple), and many of those who fall in high family bracket will benefit from a large deduction. In this background Trump intends to reduce the 39.6 percent rate by bringing it down to 33 percent in order to:
a) Reduce top income tax rates
b) Lower tax rate on business income by 15%7
That opens up room for people to find ways to turn what is now taxed as individual income into “pass-through” business income at the 15 percent rate, particularly for those who are in a position to hire expert tax lawyers to help them to figure out the details.8
In contrast to these proposals, Clinton is proposing a surcharge on income which is more than $5 million; the net result would be that tax rate for highest earners would stand increased to 44 percent. And she is proposing a 30 percent rate for those who earn more than $1 million thereby preventing high earners from paying tax on lower rates.10 In addition, she intends to limit the value of tax deductions, and may force the taxpayers to opt for longer holding periods thereby extending the benefit of low rate of capital gains.11
The case of low income and middle income families At present, the marginal income tax rate stands at 15% and apply to families earning up to $75300. However, in practical terms around 45% of taxpayers do not pay individual income tax12 due to availability of various tax credits.13
In this regard Trump proposes that:
a. Child care tax be made deductable;14
b. Its advantages be shared more broadly, but how it will be shaped into practice is not known.
As per the proposed policy of Clinton, the ordinary Americans will experience no change on their current burden.15 Nevertheless she intends to make child care more affordable and wants a child care tax credit. Her tax plan does not reveal the details in this regard.16
The estate tax Presently, an estate up to a value of $5.45 million is exempt from taxation and for a married couple the exempt limit stands $10.9 million. Above these levels the rate of tax stands at 40% (before being passed on to heirs). In this regard Trump proposes to eliminate this tax. The assets are to be allowed to be passed on to heirs without being taxed. Clinton, however, proposes to lower the exemption limit to 3.5 million for individuals and $7 million for married people.17
Corporate tax The current scenario is quite complex. The tax rate is 35%18
a. To reduce the tax rate to 15%
b. The tax would be applicable to partnerships and all other types of businesses. These types of taxpayers currently pass their profits on to individuals who then are taxed at individual income tax rate which currently stands at 39.6 percent. Clinton also proposes to eliminate a wide range of business deductions.19 The proposal would sharply reduce the tax burden and it would reduce state income by 1.9 trillion dollars over the next decade.20
On the other hand, Clinton proposes to dissuade companies from moving operations abroad to save taxes. She also proposes to discourage tax inversions.21 She intends to limit the deductibility or interest when it is used as a tool to avoid American taxes. She also intends to introduce ‘exit tax’ on companies that relocate outside the US without first repatriating earnings kept abroad.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates Karachi)
1. But many estimates suggest it is either small or negative.
2. A written public declaration of policies, intentions, opinions or motives especially one produced by a political party.
3. Unless there is the type of economic boom be promises amid tower taxes.
4. The agenda includes child care, roads, bridges and other infrastructures.
5. It shows where exactly a candidate’s priorities and vision are.
6. It would increase real income after deducting tax income by 5.3 percent of the 1 % riches people.
7. This rate would be applicable to all sorts of businesses including partnerships and sole proprietorship.
8. For example, an executive who is paid $1 million in salary could instead form a limited liability corporation to “sell” $1 million of management services to his or her old company, cutting the tax rate to 15 percent.
9. Surcharge at the rate of 5 percent
10. This is possible due to low tax rates on capital gains
11. Such steps would make these proposals less favourable amongst the high earners.
12. They do pay federal payroll taxes.
13. These tax credits particularly favour families having children.
14. But practically, it would provide no advantage 45 percent of people are paying no tax and would provide advantage to people in higher income bracket.
15. See the analysis of Tax Policy Centre.
16. However, it is submitted that a refundable credit may avoid the problems created by offering a tax deduction.
17. More taxes would be payable by wealthy families.
18. However, there exists a complex range of deduction that means the effective rate is much lower.
19. These new lower tax rates reduce the incentives to keep funds outside.
20. See the Tax Foundations estimate.
21. In which a United State firm merges with a foreign competitor and moves its corporate headquarters overseas in order to get access to lower taxes in the merger partner’s country.Zafar Azeem, "Emerging new directions in the American tax policy," Business Recorder. 2016-08-27.
Keywords: Economics , Budget deficits , Investment analysis , Tax planning , Tax assessment , Individual investors , Low tax rates , America