US taxes and the race for the White House
This US presidential election has been anything but predictable. The candidates bidding for the job have a long agenda to attend to, and one item on that list that’s up for debate is US corporate taxes. Andrea Murad reports.
The world is as interconnected as ever, and countries need to provide corporations with the tools to participate and grow in a global economy. Current American corporate and international tax policies are outdated and don’t necessarily apply to today’s global economy.
“We’re getting to the point now where the expenditures that will be needed by the US government far exceed the projected revenue that will come from tax revenues under the current tax regime,” says Ed Liva, Professor of Practice and Director of the Graduate Tax Program at Villanova Law School. “Something has to be done to increase tax revenues.”
The US tax code last experienced meaningful reform in 1986 under Republican President Ronald Reagan. At that time, the country was working with the 1954 tax code that had yet to be reformed. “It was roughly 30 some years old and out of date primarily because in the early 80s, the US was in the process of converting to a manufacturing-based economy to a service-driven economy,” says Ed.
At that time, Reagan worked with Democratic Speaker Tip O’Neill to create a piece of legislation that increased taxes by allowing income to grow.
While most US presidents don’t lead the charge when it comes to tax reform, it’s not out of the realm of possibilities for a newly elected president to do just that. In the meantime, the candidates have provided a glimpse of their vision.
Presumptive Democratic Nominee Hillary Clinton
Clinton hasn’t proposed much with regards to tax reform for corporations. “[Clinton’s] policy is very slim and very barren,” says Ed. “She adds a couple points of taxation to the highest percent of individuals. Everything is pretty status quo, and its designed to be a safe bet.”
With regards to the international issue, she has a provision to make inversions difficult and is limiting interest deductions. Her proposal includes an “exit tax” on unrepatriated corporate earnings.
She is also looking to level the playing field when it comes to hedge funds and private equity, which currently pay a lower tax rate than individuals.
“From a corporate perspective, [Clinton’s] going to try to close the loophole that the hedge funds have been operating under for many years — the carry interest situation,” says Ian Wise, Assistant Professor in the Business Administration Department at Wagner College. “It’s where hedge funds income is treated as capital gains and they’re taxed at a much lower rate than ordinary income.”
Clinton is also looking to assess a tax or fee on algorithmic traders.
Presumptive Republican Nominee Donald Trump
While Trump’s tax policy does move in the right direction in some areas, his cuts could cause the deficit to balloon.
“He does make a meaningful attempt to address international issues and tries to prevent inversions,” says Ed.
As there is a tax deferral that exists when US subsidiaries earn their income in foreign jurisdictions, repatriating this money requires paying a significant tax. “What Trump and a number of other politicians have proposed is a one-time toll charge tax — a one-time 10% tax on all of this deferred income,” says Ed. “At least that’s a starting point for addressing the issue.”
At the same time, Trump proposes slashing tax rates across the board, with corporate rates cut from 35% to 15%, which could have a significantly negative impact on the deficit. He also proposes repealing most tax breaks for businesses and the corporate alternative minimum tax.
“The analysis says that’ll blow up the deficit unless you can find substantial spending cuts,” says Ian. “The consensus I found was this would be a fairly substantial increase to the deficit if Trump were to get his policies enacted.”
According to the Tax Policy Center, federal revenue would be reduced by $9.5 trillion in the first decade if Trump’s proposal is adopted and $15.0 trillion in the next decade. These figures have the potential to be much higher when including added interest costs or consider macroeconomic effects. Lower corporate taxes would account for about a third of lost revenue, with individual tax cuts contributing to a majority of lost revenue.
Throughout the campaign, Trump’s platforms have often changed. Also, while his tax plan could be detrimental to the country, he’s expressed a willingness to negotiate with Congress on this topic.
Despite campaign promises, candidate’s proposals don’t always make it into legislation too. “A lot of things are said in elections that never come to pass,” says Ian.
About the author
Andrea Murad is a New York–based writer. Having worked on both Wall Street and Main Street, she now pursues her passion for words. She covers business and finance, and her work can be found on BBC Capital, Entrepreneur.com, FOXBusiness.com and InstitutionalInvestor.com.