In this blog post, I will provide a brief analysis of the tax proposal of the presidential candidates from the two major parties. First, I will examine the relevant portions of Republican nominee Donald Trump’s tax proposal and their potential impact on U.S. businesses and the overall economy. Then, I will do the same with Democratic nominee Hillary Clinton’s tax proposal.
Among the major components of Trump’s current tax plan are a reduction in the business tax rate from 35% to 10% for businesses of all sizes, a one-time tax of 10% for the repatriation of corporate profits held offshore, and an option for firms engaged in U.S. manufacturing to expense capital investment and lose the deductibility of corporate interest expenses.1
According to a recent study, Trump’s plan could incentivize many wage earners to form pass-through entities that provide labor services to their current employers instead of taking compensation in the form of wages.2 This might cause the presumably unintended consequence of an unforeseeably large amount of pass-through entities made for the sole purpose of tax avoidance.3 However, the one-time repatriation tax would reduce the incentive for businesses to reclassify domestic income as foreign source to avoid taxation, and would disincentivize U.S. corporations from moving their tax residences overseas.4 All in all, the study finds that the plan would increase aggregate output partly because of the option to expense investment, which would incentivize businesses to increase investment spending, which in turn would increase demand.5 In the long run, however, the predicted results seem a bit less rosy as GDP would decline by 0.5% in 2026 and by 4% in 2036.6 This overall result is corroborated in a study by the Wharton School of the University of Pennsylvania, which concludes that Trump’s tax plan would result in less economic growth in the long run.7
Clinton’s plan also disincentivizes corporations from moving overseas to avoid taxes, calling for a 50% threshold for foreign company shareholder ownership after a merger before an American company can give up its U.S. identity.8 Regarding small businesses, Clinton plans to cut taxes by expanding expensing, easing eligibility for cash accounting, and raising deductions for small businesses from $5,000 to $20,000.9 Additionally, the plan provides incentives for profit-sharing and apprenticeships10.
One study estimates that Clinton’s plan may create a 2.6% reduction from the currently expected GDP growth from 2016-2025, mostly due to higher marginal tax rates on capital and income.11 A second study suggests that GDP may decrease in the short term since business tax changes and rate increases on high-income households would reduce incentives for business investment spending, further decreasing demand.12 However, the same study calculates an increase in GDP by 0.5% in 2036.13 A third study concludes that Clinton’s tax plan reduces federal debt relative to current policy, resulting in more economic growth in the long run.14 Overall, the above studies seem to indicate that Clinton’s tax policy would drop GDP in the short run, but would improve GDP in the long term.
In conclusion, Trump’s current tax plan would create an economic boost in the short run but would cause an overall decrease in GDP growth over the long run, while Clinton’s proposal lowers GDP growth in the short run but does the opposite in the long term.
Donald J. Trump, Tax Plan, https://www.donaldjtrump.com/policies/tax-plan (last visited Oct. 18, 2016). ↩
Jim Bunns et. al, An Analysis of Donald Trump’s Revised Tax Plan, Urban-Brookings Tax Policy Center, at 4-5 (Oct. 18, 2016), http://www.taxpolicycenter.org/publications/analysis-donald-trumps-revised-tax-plan/full ↩
see id. at 6 ↩
Id. at 6 ↩
Id. at 13 ↩
Id. at 18 ↩
Univ. of Penn. Wharton Sch. of Bus., Penn Wharton Budget Model’s Tax Policy Simulator, Penn Wharton (Oct. 17, 2016), http://www.budgetmodel.wharton.upenn.edu/issues/2016/10/16/penn-wharton-budget-models-tax-policy-simulator ↩
Hillary Rodham Clinton, Ending Inversions and Investing in America (Dec. 8, 2015), https://www.hillaryclinton.com/briefing/factsheets/2015/12/08/ending-inversions-and-investing-in-america/ ↩
Kyle Pomerlaeu, Details and Analysis of Hillary Clinton’s Tax Proposal, Tax Foundation (Oct. 12, 2016), http://taxfoundation.org/article/details-and-analysis-hillary-clinton-s-tax-proposals-october-2016 ↩
Richard C. Auxler et. al, An Updated Analysis of Hillary Clinton’s Tax Proposals, Urban-Brookings Tax Policy Center, at 14 (Oct. 18, 2016), http://www.taxpolicycenter.org/publications/updated-analysis-hillary-clintons-tax-proposals/full ↩
See Univ. of Penn. Wharton Sch. of Bus., Penn Wharton Budget Model’s Tax Policy Simulator, Penn Wharton (Oct. 17, 2016), http://www.budgetmodel.wharton.upenn.edu/issues/2016/10/16/penn-wharton-budget-models-tax-policy-simulator ↩