Here's Hillary Clinton's Tax Plan: The Good, the Bad and the Ugly

Under a Bernie Sanders presidency, Americans would pay more taxes. And under President Hillary Clinton, they would, too -- though probably not as much. And the trade-offs, on at least some fronts, would likely be worthwhile.

Clinton's proposal to impose a 28% limit on tax deductions would raise a reasonable amount of revenue without substantially harming the economy, according to a new analysis from The Tax Foundation. The Washington, D.C.-based think tank calls the itemized deduction arm of the former secretary of state's platform "the best provision" in her tax plan. "If the revenue is put to good use, this is a proposal worth doing," they write.  

The presumptive Democratic nominee has said as president she would limit the value of certain deductions and exclusions to 28%, a move that would reduce the benefit of tax breaks for those in higher tax brackets. The Tax Foundation estimates it would generate $217 billion in total revenue over 10 years after considering economic impact, but if it is matched with spending that creates growth -- like infrastructure projects -- that offsets any negative effects of a tax increase, then it would increase revenue by $310 billion.

But not all of Clinton's plans for the American tax system would be as beneficial. A separate analysis from The Tax Foundation estimates that when accounting for reduced GDP by about 1% over the long-term due to slightly higher marginal tax rates on capital and labor, Americans would see their take-home pay fall by at least 0.9% with Hillary in office.

The top 10% of taxpayers would see a 1.7% drop in after-tax income, and the top 1% would see a 2.7% drop.

"If enacted, her tax policies would impose slightly higher marginal tax rates on capital and labor income, which would result in a reduction in the size of the U.S. economy in the long run," analysis authors Kyle Pomerleau and Michael Schuyler write. "This would decrease the revenue that the new tax policies would ultimately collect. The plan would lead to lower after-tax incomes for taxpayers at all income levels, but especially for taxpayers at the top."

The plan would raise tax revenue by $498 billion over the next decade on a static basis, but on a dynamic basis, the foundation estimates it would collect $191 billion.

Static scoring assumes tax code changes will have no change on economic behavior, while dynamic scoring contemplates such effects. The merits of both methods are debated in the tax policy community. 

"We know that tax rates do affect economic growth, but we don't know how big that that effect is," said Susannah Camic Tahk, associate professor of tax law and Policy and the University of Wisconsin-Madison.

It is worth noting that The Tax Foundation tends to be right-leaning in its analysis; the dynamic vs. static analysis largely cuts across ideological lines. Bob McIntyre, the director of Citizens for Tax Justice (CTJ), a left-leaning Washington, D.C.-based tax policy think tank, said the analysis is "based on the disproven ideological premise that tax cuts always create growth and that any tax increase will always hurt the economy."

Broader economic impact aside, those most affected by Clinton's tax proposals would be the highest earners and earning income from capital gains. In other words, her pledge to get tough on Wall Street, corporations and the wealthy would be a money-maker for the U.S. government.

Clinton's plan would create a 4% surcharge on those with incomes of $5 million and above. The result: an additional marginal tax rate of 43.6% for top earners and a 24% top marginal tax rate for qualified dividend and long-term capital gains income.

Her enactment of the Buffett rule, which would establish a 30% minimum tax on those with an adjusted gross income of over $1 million, and cap on itemized deductions, according to The Tax Foundation, would be impactful in terms of revenue as well.

Combined, the measures, as well as a restored estate tax to 2009 parameters and the elimination of a deduction for reinsurance premiums paid by businesses, Clinton would increase revenue by $600 billion on a dynamic basis.

What would subtract revenue, The Tax Foundation says, is her capital gains policy. Under her proposals, rates on medium-term capital gains would increase to 47.4% from 27.8%. According to the authors, this "would actually end up losing revenue on both a static and a dynamic basis due to the incentives it creates to hold on to assets longer."

The analysis concludes that the 10-year dynamic impact on revenue would be a decline of $409 billion (and there you have that $191 billion number: $600 billion in additional revenue collected minus $409 billion in revenues that would not be collected).

Tahk echoed the contention that an increase in capital gains taxes lead to people holding onto their investments longer; however, it is difficult to estimate the exact timeline. "We don't know how big the effect is," she said.

Revenue decline could potentially be greater or smaller than the Tax Foundation's estimates.

Clinton's idea on taxes are a stark contrast to those coming from the the GOP, which entail major changes to the U.S. tax code and significant tax cuts.

Donald Trump plans to dramatically alter and eliminate some sections of the code. The plan cuts taxes for the rich significantly (essentially the opposite of what Clinton wants to do) and would an increased budget deficit or require cutting social programs. 

"By proposing to raise revenues, Clinton has set herself apart from all the Republican candidates who are proposing massive, top-heavy, deficit financed tax cuts," said McIntyre, a Washington, D.C.-based tax policy think tank.

Tahk pointed to another aspect of Clinton's tax proposal that sets her apart: new tax credited aimed at social policy goals.

"She has a whole grab bag of these tax credits," she said. "It's an interesting decision from what a lot of the other candidates are proposing, they don't have this whole basket of tax credits aimed at encouraging taxpayers to do different things."

The Tax Foundation acknowledged it omitted modeling for some of Clinton's proposed tax credits, such as one for caregiver expenses and another for profit-sharing and apprenticeships, due to data limitations or insufficient details from the candidate. It also left out her IRA limitation proposal and suggestion of a new tax on high-frequency trading.

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