An Economic Perspective of the Proposed Presidential Tax Plans
Tax proposals are always a big part of presidential campaigns’ stump speeches. Despite the fact that the President alone can’t affect any change on fiscal policy (it takes Congress to do that), candidates often opine on the many ways in which they will change the world via tax changes. Also, there are always a number of articles that come out and suggest the potential impact on your tax bill, if the policies get enacted. But, is that the correct perspective? After all, tax policy is only one factor in the bigger question of fiscal policy. Tax policies should be viewed with a wider lens – an economic lens. In this article, we will look at the candidates’ policies from an economic perspective, and more importantly, how that economic perspective may affect you.
Each election year, we hear that the tax plans between the two candidates could not be more different; this year is no different. Here are some of the more important highlights.
Tax Plan Comparison: Trump vs. Clinton
|Higher Incomes/High Net Worth||
||No changes. The current plan stays intact.|
||No change to corporate tax rate|
|Carried Interest Loophole (Hedge Funds/PE Funds)||Would eliminate loophole, but funds could use pass-through corporations tax rate||Would eliminate the loophole|
|Estate Taxes||Would eliminate the estate tax||Would increase the estate tax from 40% to 65%, and lower the threshold from households worth 5.45M to 3.5M|
At first glance, it’s very simple to the see the narrative. Trump wants to lower taxes, and Clinton wants to raise them, especially for the wealthy. However, that’s just the headline of the story. Since we are taking a more economic look at the tax plans, let’s start with a broader view: a look at fiscal policy. Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy. Since the government doesn’t have money of its own, there are only two ways to get it. The government can either tax for the money that it wishes to spend, or if the income from taxes isn’t enough, then they have to borrow the money. Borrowing money introduces monetary policy, which is a topic for another day.
So, what does the government spend money on? A lot of things. The military, infrastructure, government buildings, salaries of millions of workers, pension plans, entitlement programs, and the list goes on. So, the economic question is “What government spending should your tax dollars be dedicated to, that will result in productive dollars that have a chance to affect your daily life?” Easy to ask, much more difficult to answer.
One of the reasons this question is so difficult to answer is that it largely depends on your personal economy. We can probably all agree that certain infrastructure projects that utilize public or private partnerships can be productive for all of us. They create jobs, which pumps money into the economy, but more importantly, they use private companies as investment partners in these projects. Many of the expenditures in which the government engages are not so cut and dry. For example, Hillary Clinton wants to enact debt-free college. This will have to include some type of government spending to accomplish this grand idea. If you’re a parent sending a kid to college, or an upcoming college student, this may be a very productive use of government spending. If college tuition doesn’t affect you at all, then it would be a bad economic investment. Donald Trump wants to significantly increase military spending. If the company you work for has military contracts, this would certainly be an attractive use of funds to your situation.
There’s one more thing to think about as you analyze and compare tax plans. Who has the ability to truly execute the plan? Not just implementing the tax plan, but also spending the proceeds appropriately to impact your personal economy positively. If Donald Trump passes his low tax plan, can he actually execute his desire to double infrastructure and military spending without driving up the debt? If Hillary Clinton passes her tax increases, can she run an efficient and effective government without creating a massively bloated governmental organization? Either of these less than desirable outcomes would not result in the economic boost that you would be looking for in your personal life.
If you analyze your situation, and match your desired outcome with the person whose ideas are most aligned with your economic goals, then your vote is powerful.
Economics are most optimally viewed from a personal perspective. Tax policy should be no different. The question is less about how much taxes you will pay, but more a question of what will the use of those taxes will be, and whether you believe the leader that you are voting for can truly execute their plans. If you analyze your situation, and match your desired outcome with the person whose ideas are most aligned with your economic goals, then your vote is powerful.