Even though the economy is a largely unpredictable and uncontrollable entity, the government has various tools at its disposal which can be used to regulate the booms and busts of the business cycle. The most important of the tools available are monetary and fiscal policy. Monetary policy is implemented by the Federal Reserve and it consists of manipulating interest rates through open market operations. Fiscal policy, on the other hand, is based off of the level of taxes that are imposed on citizens by the government. In order for the economy to run smoothly both tools need to be used effectively by the institutions that control them.
Currently, the Federal Reserve which is headed by chair Janet Yellen is pursuing a policy of low interest rates in hopes of stimulating the now recovering economy. In November the people of the United States will elect a new president and thus we will have a new tax policy in place. Hopefully, this tax policy will complement the efforts of the Fed and allow for a better recovery than what we have seen so far. So who is the best person for the job when it comes to taxes? Ultimately that is for the voters to decide, but a breakdown of each of the nominee’s plan and an analysis of their effectiveness would probably make the decision a lot easier.
Hillary Clinton (Democrat):
The prospective democratic nominee has said that if she were to win the presidency she would expand existing social programs such as Social Security and federal student aid, as well as create new programs like paid family and medical leave. All of this would, of course, require a substantial amount of money which would be raised by collecting more taxes. Secretary Clinton has said that she plans on increasing taxes on individuals and business incomes. In addition to this she has also proposed the following measures: a cap on itemized deductions at 28 percent, enacting the “Buffet rule” which was established during President Obama’s tenure, implementing a 4 percent surtax on individuals earning more than $5 million each year, restoring the estate tax to where it was in 2009, and limiting or eliminating various deductions for individuals and corporations.
The tax plan will increase current tax revenue by $494 billion over the next ten years on a static basis and by $191 billion during the same time period on a dynamic basis. All of the secretary’s policies are meant to increase revenue except for one: changing the long-term capital gains schedule. She hopes that doing this will encourage more investments in the future, even if it does mean less tax money coming in. As far as the economy goes, experts say that the plan would reduce the country’s GDP by one percent in the long run, which translates to a 0.8 percent reduction in wages and 311,000 fewer full-time jobs. This is said to be the result of implementing a higher marginal tax rate on capital, labor, and individuals earning more than $5 million each year.
Clinton’s plan is all based on the rich “paying their fair share” and they certainly will if she gets into the oval office. According to the Tax Foundation, her tax plan will make it so that, on a static basis, those who constitute the top 10 percent of earners will see a 0.7 percent reduction in their after tax incomes and those who make up the top 1 percent will see a 2.7 percent reduction. Everyone else will, at the very least, will see a decrease of 0.9 percent.
Even though Clinton says she will go after the very rich, everyone will lose. This means that everyone will have less money to spend on goods and services and, being that consumption is the biggest driver of economic growth, this will not help the recovery but instead it will slow it down. We need a president that understands that a healthy economy does more for everyone than a variety of expensive social programs, and it seems as though Clinton will not be that president. I understand the importance of helping out the lower and middle classes through social services, but most economists agree that the best way to help is by increasing their discretionary income, not reducing it. Overall, the former Secretary’s plan seems to be a continuation of President Obama’s policy; this means that nothing is going to go terribly wrong, but the current economic situation will not get tremendously better either.
Donald Trump (Republican):
It seems that in almost every aspect, Trump’s proposed tax policy differs from that of his main opponent Hillary Clinton. His website has a whole section dedicated to the “tax reform that will make America great again.” In this section he states his four main goals when it comes to tax policy: tax relief for the middle class, simplifying the tax code, growing the American economy, and creating tax policy that does not add to the national debt or deficit. He goes into further detail by promising that if elected President then…
- Single individuals earning less than $25,000 or married individuals jointly earning $50,000 will not have to pay any income tax at all. According to the campaign, this policy would affects 75 million households.
- The tax code will be simplified by reducing the number of tax brackets from seven to four—zero percent, 10 percent, 20 percent, and 25 percent
- The marriage penalty and the Alternative Minimum Tax will be done away with
- There will be no more than a 15 percent tax on business income no matter the size of the firm
- The “death tax” will be eliminated
Obviously, all of this makes it so that the government would collect substantially less in tax revenue. The Tax Policy Center reported in their analysis of Donald Trump’s tax plan that his policy would “reduce federal revenues by $9.5 trillion over its first decade.” This largely has to do with the fact that everyone would be getting a tax cut, especially the very rich. The top 0.1 percent of taxpayers would receive a tax cut of $1.3 million on average, which is 19 percent of after tax income. Middle-income households, by comparison, would see a $2,700 cut, or 4.9 percent of after tax income.
The philosophy behind all of this is that reducing taxes for everyone would increase their incentive to work, save, and invest thereby stimulating economic growth. This means that Donald Trump’s policies would line up very well with that of the Federal Reserve. By this I mean that, unlike Hillary Clinton whose tax plan would run counter to the Feds policy of low interest rates, Trump’s tax plan would move in the same direction of stimulating the economy. This sounds like a good thing but it may not be worth the tremendous loss in revenue. Of course, Trump does not plan on expanding or creating social programs like Clinton so he would not need as much money coming into the government as she does, but $9.5 trillion is a lot to lose even for the most anti-government conservatives.
Gary Johnson (Libertarian)
Now, I know that the Libertarian Party and their nominee Gary Johnson do not have much of a chance of reaching the oval office, but I thought it would be interesting to look at the tax policy they proposed called the Fair Tax Plan. The Fair Tax Plan involves eliminating the personal income tax, social security tax, Medicare tax, capital gains tax, self-employment tax, estate tax, and the alternative minimum tax and instead imposing a sales tax on goods and services of around 30 percent. As a result of this system being put into place, the IRS would be abolished.
The main problem with this plan is that it’s all theoretical; it has never been tested out in the real world. The idea behind the tax is that it will allow business to keep more of the money they earn thereby allowing them to grow faster than they would under the current tax policy. Also, the fact that there would no longer be any capital gains tax would mean more investment. Proponents of the Fair Tax Plan are typically individuals who are wealthier and who want smaller government. They believe that income taxes and other similar measures constitute an unjust exercise of governmental power. Perhaps they are right in some ways, but this does not excuse the fact that the plan would likely be detrimental to the U.S. economy
Most mainstream economists agree that the plan is not viable since it penalizes the lower and middle classes and favors the rich, and because it discourages spending which is the most important contributor to economic growth. Therefore, even though it may seem fairer, it most likely would not be more efficient. I completely understand that people feel it is unfair that the government take away money that they earned, but the alternative is economic collapse, something which nobody wants.
Glossary of Terms:
- Cap on itemized deductions – this limits the ability of individuals to decrease their taxable income
- The Buffet Rule – a minimum tax rate of 30 percent on individuals making more than $1 million a year
- Surtax – an additional tax on something already tax
- Static Basis – without accounting for decreased economic output in the long run
- Dynamic Basis – accounting for decreased economic output in the long run
- Marginal Tax Rate – the percentage of tax applied to your income for each tax bracket in which you quality
- Long Term Capital Gains Rate – a tax on a qualifying investment owned for longer than 12 months and then sold
- Marriage Penalty – a tax penalty that comes from filing your taxes jointly with your spouse
- Alternative Minimum Tax – a supplemental incometax imposed in addition to baseline income tax for certain individuals, corporations, estates, and trusts that have exemptions or special circumstances allowing for lower payments of standard income tax.
- Death Tax – another name for the estate tax, otherwise known as the inheritance tax
Hillary Clinton Campaign: https://www.hillaryclinton.com/issues/
Donald Trump Campaign: https://www.donaldjtrump.com/positions/tax-reform
The Tax Policy Center: http://www.taxpolicycenter.org/publications/analysis-donald-trumps-tax-plan/full
Gary Johnson Campaign: https://garyjohnson2016.com/issues/
Money Crashers: http://www.moneycrashers.com/fair-tax-act-explained-pros-cons/