in the plan

good morning hank, it's tuesday. so in sunday's us presidential debate, a voter asked: "what specific tax provisions will you change to ensure the wealthiest americans pay their fair share in taxes?" the candidates' answers were interesting, but limited. so today i thought i'd take a look at hillary clinton and donald trump's tax plans. but to do that, we need to understand the current us tax system, which unfortunately is not uncomplicated. so let's imagine three married couples with two children a piece. the johnsons make the median household income of $52,000 per year. the kennedys make $300,000 per year and the roosevelts make a million dollars a year.

definition time. so your top marginal tax rate is the tax rate you pay on you last dollar of income. for the kennedys that's 33%. but that's not actually the percentage of their income that goes to federal income taxes because no matter how much money you make your first $18,450 of income is taxed at 10%, the next 56ish thousand dollars is taxed at 15% and so on in the end, the kennedys pay about $66,424 in federal income taxes under the current system that's 22% of their income, that's their effective tax rate. the roosevelts, with their million dollars of income

pay about $336,500 in federal taxes an effective tax rate of 33.6% or .7 if you want to round up. but god knows it can't be that simple because usually families like the kennedys and the roosevelts pay less in taxes due to deductions. the u.s tax code allows you to deduct certain expenses from your income like charitable donations, some retirement savings and mortgage interest and you could either itemize your deductions by listing them

or take the so called standard deduction which is available to all taxpayers for married couples filing jointly, it's currently $12,600 ok, i know this is a little bit complicated but stay with me lastly we have the johnsons, with their income of $52,000 a year the johnson's can expect to pay $553 in federal income tax an effective tax rate of just over 1% wait, what? right, so first the johnsons take the standard deduction of $12,400 ($12,600) which brings their taxable income down to $39,600 (39,400)

you also take a $4,050 personal exemption for yourself, your spouse and your two kids. thats $16,200 which brings the family's taxable income down to $23,200 they would pay about $2,553 of taxes on that income except, for child tax credits there is 1,000 dollar tax credit for each dependent child you have so thats how the johnsons get down to $553 and i think this is really important to understand because it underscores that for the half of american families making less than $52,000 a year

federal income taxes are quite low in fact, a large majority of those households pay no federal income tax at all they do pay lots of other taxes though like payroll taxes, which neither candidate is proposing to change and sales and property taxes which are local and therefore not under the purview of the president but its really critical to remember that federal income tax policy can only do so much ok, so we're going to look at both these proposals mostly using analysis from the tax foundation, which, for the record, is non-partisan but usually considered conservative leaning let's start with hillary clinton's tax plan, which she described like this

"nobody who makes less than $250,000 a year, and that's the vast majority of americans as you know" "will have their taxes raised" "because i think we've got to go where the money is" and thats accurate clinton's plan mostly leaves the tax code unchanged with four main differences first, income over 5 million dollars per year which is currently taxed at 39.6% would be taxed at 43.6% there's a lower tax rate on capital gains which is like sale of appreciated stock or of a business

and on capital gains over 5 million dollars, clinton's tax plan would also increase that rate 4 % from 20 to 24 % secondly households with over a million dollars in income would have to pay at least a 30% effective tax rate so basically they couldn't use deductions to get under a 30% tax rate third carried interest would be taxed like regular income this is a little bit complicated but basically carried interest allows many investment bankers to claim most of their income as capital gains rather than as ordinary income

which means they pay lower tax rate this would close this so called loophole and lastly clinton's plan would double the child tax credit and also introduce a new $1,200 tax credit for caregivers so if you're taking care of an elderly or disabled family member that credit would be available to you there would also be some changes to the estate tax and some corporate taxes would change in an attempt to keep u.s companies from shielding their income from u.s taxes so under the clinton tax proposal neither the kennedys nor the roosevelts would see their taxes change

unless the roosevelts are claiming hundreds of thousands of dollars in deductions in which case their taxes might go up slightly the johnson's however would see their federal income tax rate go from $553 a year to 0 because of the increase in the child tax credit so just to be clear, at the debate when donald trump said "she is raising everybody's taxes massively" that's just not true for the vast majority of americans but there is a cost to tax increases even when they're only focused on the rich they discourage investment and business spending

like the tax foundation says that the clinton plan would reduce overall u.s economic output by 1% over the long term other projections have it much lower but regardless it would have some effect it would also of course create new government revenue which would be used to pay for subsidized college, infrastructure projects and paid family leave most non-partisan analyses conclude that after accounting for all of this the clinton tax and budget proposal would add about $200 billion to the u.s debt over the next 10 years

ok, lets talk about donald trump's new tax plan which is quite different from the one he released in june and which i talked about here at the debate he said "we're cutting taxes for the middle class" "and i will tell you we are cutting them big league for the middle class" so trump's plan features three marginal tax brackets for married couples filing jointly income up to $75,000 dollars a year would be taxed at 12% from there up to $225,000 would be taxed at 25% and above $225,000 would be taxed at 33% he would also cap deductibles for married couples at $200,000 a year

he would make child care expenses deductible up to the average cost of childcare in your state increase the standard deduction from $12,600 per year for married couples filing jointly to $30,000 a year and he would get rid of personal exemptions as you'll recall, those personal exemptions allow you to take $4,050 off your income for each member of your family eliminating them, even with the increase in the standard deduction would mean that for many families with single parents of with more than three children making between 60-100,000 dollars a year taxes would actually go up somewhat under trump's plan

this would be the case for about 7.8 million households but for the rest of us our federal income taxes would stay about the same or go down under trump's plan like if we look at our three hypothetical families the johnsons would see their federal income taxes go from $553 a year to $400 the kennedys, making $300,000 a year, would pay about $46,350 in taxes a reduction of about $20,000 from the current system and the roosevelt's would pay about $287,250 as you can see the tax cuts are heavily concentrated on the wealthiest individuals who pay the most income tax

trump's plan would also decrease the corporate tax rate from 35% to 15% and like clinton's plan it would seek to get back some of the profits that are offshore from u.s companies and it would close the carried interest loophole in total, before accounting for macroeconomic effects trump's plan would lower revenue somewhere between 4.4 and 7.2 trillion dollars over the next 10 years depending on who's doing the math but, just as higher taxes can discourage investment lower taxes can encourage it and the tax foundation does project that trump's plan would lead to growth

but no matter what you've heard that does not mean that tax cuts pay for themselves they don't for instance both the reagan and the bush tax cuts boosted growth but they lowered federal revenues the tax foundation, which remember, is conservative leaning says that even after growth is accounted for, federal revenues will decrease under trump's plan between 2.6 and 3.9 trillion dollars now trump has proposed to pay for some of the shortfall, around 1 trillion dollars over 10 years via budget cuts

but he also wants to spend 500 billion dollars more on the military over the next 10 years so even the rosiest projections have trump's total budget and tax plan adding about 2 trillion dollars to the national debt over the next 10 years that's 10 times greater than under clinton's plan and other projections like those made by the tax policy center have that number at 7.2 trillion dollars 36 times greater than clinton's plan i want to pause for a second to discuss why this could be such a huge problem so currently the u.s.'s debt held by the public is about 77% of our total annual economic output that's high but its not so high that people are worried about our ability to pay it back

we know that because interest rates on treasury bills are near 0 it's basically seen as a guarantee that the united sates will pay its debt but if our publicly held debt to gdp ratio gets higher traditionally when it gets to 100% or 110%, that might change lenders might start to get nervous and think maybe the u.s can't pay its debts which would make loans to the united states government riskier which would make them more expensive interest rates would go up to pay for the more expensive loans the government would have to increase taxes or decrease spending

which would inhibit growth, which would lead to lower tax revenues that would necessitate taking out more loans with higher and higher interest rates which would leave less money for programs like social security and unemployment insurance which would further inhibit growth, which would lower government revenues and pretty soon greece this is called a debt spiral and it is a catastrophe that once it starts is very difficult to stop it often takes decades to unwind now the chances of a debt spiral in the united states are very low no matter who becomes president

but the non-partisan committee for a responsible federal budget has the 10-year debt from trump's tax plan rising to 105% of gdp and that is a very scary level now i want to emphasize that there are serious and thoughtful republican tax and budget plans out there but to cut taxes by the amount that trump is proposing it is necessary to cut either popular entitlement programs like medicare or else to cut defense spending dramatically serious republican budget proposals do one or both and trump's does neither

so in summary donald trump's tax plan would cut income taxes for most americans with the majority of the benefits going to the wealthiest households and small increases on taxes for some middle class families hillary clinton's tax proposals would cut income taxes for middle class families with children the rest of us probably wouldn't see much change but the wealthiest american households would have their taxes go up if you'd like much more information there are links to non-partisan analyses in the dooblydoo below i'll also try to be in comments to answer any of your questions

and if you aren't yet registered to vote, or aren't sure if you are registered please go to youtube.com/howtovoteineverystate and find your state in many states the registration deadline is today so register. please vote! hank, dftba. i will see you on friday.