What a Democratic president could mean for your taxes

The next presidential election is still more than a year off, but the political season is well underway.

Among the significant distinctions between the candidates are their tax plans. In this column, I’ll cover what the top Democratic candidates have said on the subject. As you will see, there are large differences from the tax plans advocated by the top GOP candidates, which I covered last week.

Hillary Clinton’s tax plan

In a recent speech at New York University, Hillary Clinton proposed higher capital gains taxes. The proposal is intended to combat short-term investing, which Clinton argues diverts capital away from more productive alternatives. Clinton’s plan calls for a sliding scale of rates, with shorter-term investments taxed at higher rates than they are now. Under the current rate system, short-term capital gains from assets held for one year or less are taxed at ordinary income rates, which can be as high as 39.6%. High earners will also usually owe the 3.8% Medicare surtax for a combined top tax rate of 43.4% on short-term gains. The current maximum rate on long-term gains from assets held for more than one year is 23.8%.

Under Clinton’s plan, the top rate on short-term gains would remain at 43.4%. For assets held for more than one year, rates would drop on a sliding scale before reaching the current long-term gain rates after a holding period of more than six years. The biggest impact would be on assets held for more than one year but not more than two years. Tax rates on gains from those assets would nearly double.

Economists on the left have long criticized the relatively low tax rates on long-term gains as providing a subsidy to the wealthiest Americans. There is some truth to that. A report by the Congressional Budget Office found that 68% of the tax-saving benefits from lower rates on long-term gains and dividends go to the top 1% of earners.

According to her website, Clinton would also cut taxes for families to increase their take-home pay as they face rising costs for child care, health care, and sending their kids to college. She supports enacting the so-called “Buffett Rule,” which would ensure that millionaires don’t pay lower effective tax rates than their secretaries and close tax loopholes and breaks that benefit the wealthiest taxpayers.

Clinton says she would also provide tax relief for small businesses and would create a new 15% tax credit for companies that share profits with workers on top of wages and pay increases.

In last Wednesday’s debate, Clinton didn’t say much about taxes except that the rich will have to cough up more to pay for lots of government-provided goodies — like “free” college. And I thought Bernie Sanders was supposed to be the Socialist.

Bernie Sanders’ tax plan

Under the current federal income tax regime, the top marginal rate on ordinary income from working is 39.6%, but the top rate on corporate dividends and long-term capital gains is “only” 23.8%. Sanders proposes taxing capital gains and dividends at the same rates as ordinary income from working.

Sanders has not proposed anything specific about changing individual tax rates on ordinary income from working.

Sanders also proposes restarting the 12.4% Social Security tax on wages or self-employment income in excess of $250,000. Under our current system, the Social Security tax cuts out above an inflation-adjusted ceiling ($118,500 for 2015 and 2016). Under Sanders’s “doughnut hole” approach, there would be a Social-Security-tax-free zone between $118,500 and $250,000.

Sanders would lower the threshold for the federal estate tax to $3.5 million (versus the current $5.43 million). He would also increase the estate tax rate to 50% for estates over $10 million, to 55% for estates over $50 million, and to 65% for estates over $1 billion (the current federal estate tax rate is a flat 40%).

As for corporate taxes, Sanders says he would end current rules that allow U.S. corporations to defer paying federal income tax on offshore profits. He would also eliminate tax breaks for oil and gas and coal companies.

Finally, Sanders would impose a new financial transactions levy that would tax stock trades at 0.5%, bond trades at 0.1%, and derivatives trades at 0.005%. For example, a $10,000 stock trade would be hit with a $50 tax.

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