By Robert Duquette, CPA
This blog post was updated Feb. 25 and again on March 5, 2020.
The 2020 presidential primary season is upon us, and Pennsylvania’s primary election is scheduled for April 28. With Iowa and New Hampshire getting underway, now is an opportune time to provide highlights of the various tax considerations of the leading candidates. Regardless of whom you are following, one of these candidates will win their party’s respective nomination, and some of what is outlined here may become law.
Of course, for any one of a candidate’s proposals to find its way into enactment, the candidate would have to win and have Congress’s backing – a difficulty most of the time. Then again, we all thought the same thing four years ago.
Due to practical limitations, I kept my summary to President Trump’s proposals, and the top five Democratic candidates. (These were the five candidates polling at an average above 5% as of Jan. 27, 2020, on fivethirtyeight.com.) Before each section on tax, I included a brief outline of their spending plans to show the why behind the types of tax increases or credits they are proposing. Also, this is not intended to reflect possible implications of any of the proposals since that’s beyond the scope of this particular article.
For each summary, I include a footnote to the sources I referred to regarding the most interesting and relevant aspects of the various proposals. Because the candidates do not have all their tax proposals in one organized site, and are more often than not a part of campaign speeches or press releases, there are sometimes several links. (The information here was current as of Jan. 20, 2020.)
President Trump is on record as saying he is looking forward to Tax Reform 2.0 in his second term, so I’ll start there.
President Donald Trump1
With “Tax Reform 2.0” the president would like to reduce the 22% marginal rate to 15%. The new rate would apply as follows: Single - $40,126 to $85,525; Married Filing Jointly (MFJ) - $80,251 to $171,050.
The president also wants to make permanent the current tax rates under his Tax Cuts and Jobs Act (TCJA), the itemized deduction changes, as well as the changes to the standard deduction and child tax credit and elimination of the personal exemption.
He would also like the Section 199A deduction (20% deduction for pass-through businesses) made permanent and possibly add an indexing of capital gains.
Former Vice President Joseph Biden2
In terms of spending priorities over the next 10 years, Vice President Biden has proposed spending about $750 billion to make the Affordable Care Act more affordable and to increase the quality of the “public option” for more Americans. He also wants to improve solvency of Social Security.
His plans also include creating a new $5,000 credit for caregivers, expand the child tax credit from $2,000 to $8,000, and expand the Earned Income Tax Credit to older workers beyond age 65.
Other goals include $1.7 trillion to battle climate change and increase infrastructure spending, a new credit for small businesses to set up retirement plan for employees, and the possible restoration of the full state and local tax deduction.
To fund these goals, Biden anticipates increasing the capital gains tax on those making over $1 million to 39.6% -- plus the 3.8% net investment income tax (NIIT). The Tax Foundation and Congressional Budget Office (CBO) suggest that the proposal to raise the capital gains rate to 39.6% plus the 3.8% NIIT could actually result in lower tax revenues by locking in some capital gains and keeping them from being realized.
He is considering increasing the top rate on ordinary income back to 39.6% from the current 37% and eliminating the cap on payroll taxes. This means all wages would be taxed at 7.65%, plus the employer match, and all self-employment income would be taxed at 15.3%.
He says he would reverse “the excesses of the Trump tax cuts for corporations, reducing incentives for tax havens, evasion, and outsourcing, ensuring corporations pay their fair share, closing other loopholes in our tax code that reward wealth not work, and ending subsidies for fossil fuels.” Some of these may include:
- An increase in the corporate rate to 28% (except for small businesses at 25%)
- A minimum tax rate of 15% of corporate income
- A return to the $3.5 million estate tax exemption
- A new carbon tax
- A new financial transactions tax of 0.1% of the value of the securities traded (raise about $800 billion over 10years)
- A minimum “effective” tax rate on 30% on income above $1 million
- An elimination of the S corporation payroll tax exemption on S corporation earnings
He also proposes the elimination of “step-up in basis” at death, and either have a tax realization event at death or on the later sale of the inherited assets. He has no plans for a wealth tax.
Sen. Bernie Sanders3
Sen. Sanders has a jaw-dropping $97 trillion plan for additional spending over the next 10 Years. Topping the list are a $30 trillion to $40 trillion “Medicare for All” plan which would also eliminate all medical debt, and a $30 trillion guarantee of full-time employment with a government job paying $15 an hour with full benefits.
Sanders also has a $16 trillion climate action plan and a $2.5 trillion housing proposal. Other items on his wish list include the following:
- $3 trillion for the forgiveness of all student loans and guaranteed free public-college tuition
- $2 trillion to expand Social Security
- $1.5 trillion to bolster paid family leave
- $1 trillion for infrastructure improvements
- $1 trillion investment in K-12 education spending and an increase in public school teacher salaries
All these added federal expenses will be partially funded by $16 trillion in new revenue over 10 years. Sanders plans to increase the top individual tax rates so that the 35% rate becomes 40%, the 37% rate becomes 45%, 50%, or 52% (depending on income levels), and would retain the 3.8% NIIT. He has proposed a new 4% “income-based premium” at each level above $29,000, which the senator claims will raise $3.5 trillion over 10 years. He would also cap the maximum itemized deduction benefit to the 28% tax rate for all taxpayers.
Sanders is also outlining preferential rate increases on dividends and capital gains for anyone over $250,000 that equal their new marginal ordinary rate (above), and a possible mark to market rule on securities each year, with the impact being a “recognized” taxable event.
He anticipates an increase in the payroll tax so that the full 12.4% portion applies to earnings over $250,000 (in addition to the existing 2.9%), a new 7.5% payroll tax on employers (except for the first $2 million in wages paid by small employers), and the elimination of the S corporation payroll tax exemption on S corporation earnings. He also informally suggested he prefers a return to the corporate 35% rate.
Regarding estates, the senator would impose a 45% tax rate on estates between $3.5 million and $10 million; 50% between $10 million and $50 million; 55% between $50 million and $1 billion; and 77% above that. (All thresholds doubled for married couples.) He would also eliminate the step up in basis upon death, and have the tax due at death, not later when an asset is sold.
Sanders is proposing an annual wealth tax on top 0.1% of taxpayers, and maintains that it would bring in $4.4 trillion:
- 1% on net worth above $32 million
- 2% on net worth from $50 million to $250 million
- 3% on net worth of $250 million to $500 million
- 4% on net worth of $500 million to $1 billion
- 5% on net worth from $1 billion to $2.5 billion
- 7% on net worth from $2.5 billion to $5 billion
- 8% on net worth over $10 billion
Sanders’s tax plan also attempts to close what he sees as an “exorbitant pay gap” between executives and typical workers:
- Companies with large gaps would see progressively higher corporate tax rates of up to 5%.
- Would apply to CEO-to-median-worker ratios starting at 50:1 (0.5 pt additional rate) to more than 500:1 (5 pts greater rate).
- Would apply to all private and publicly held corporations with annual revenue greater than $100 million.
Sen. Elizabeth Warren4
[Ended campaign March 5, 2020]
Sen. Warren’s spending and tax plans over the next 10 years have been split between her “Medicare for All” plan and some of her other prominent plans. Combined, they come close to $30 trillion in new spending.
The 10-year cost for her “Medicare for All” is as follows: the $34 trillion gross cost would be lowered to $21 trillion by reduced insurer administrative costs, changes to health care payments, slower growth of medical costs, reduced prescription drug costs, and the redirection of $6 trillion in existing state and local government health care spending. In addition, taxpayers would retain $10 trillion after taxes in saved health care premiums and out of pocket costs.
The funding for “Medicare for All” over 10 years breaks down as follows:
- $8.8 trillion would come from employers, who will pay 98% of their share of premiums directly to the IRS instead of third-party insurers. Additional contributions would be required from corporations with large executive compensation and stock buybacks if needed to make the revenue goal.
- $1.4 trillion would arise from employees who will now have an increase in taxable wages due to their $3.7 trillion projected portion of health care premiums now being paid directly by their employer.
- $100 billion will come from a new 0.15% Systemic Risk Fee on covered liabilities on institutions with more than $50 billion in assets.
- A new minimum 35% tax on foreign profits (less credit for foreign taxes paid) and a 35% tax rate on foreign-owned companies on the portion of their worldwide sales made domestically is expected to bring in $1.7 trillion.
- $1.3 trillion will come from repeal of business immediate expensing.
- A new annual “wealth tax” on 75,000 taxpayers is expected to raise $1 trillion for the plan: 6% on net wealth above $1 billion and 2% on net wealth above $50 million and up to $1 billion. $2 trillion would arise from elimination of the preferential rate on dividends and capital gains on the top 1% of taxpayers and mark to market annual taxation of capital gains income on the top 1%.
- Finally, $800 billion would come from a new 0.1% “Financial Transactions Tax” on the purchase of most stocks and bonds; $2.2 trillion would come from closing the annual “tax gap”; $400 billion would appear through immigration reform that allows more workers into the United States; and $800 billion would be offset by reduced defense spending.
Here are some of Warren’s other plans and their costs over 10 years.
Her expectation to expand Social Security benefits would see the average senior, on top of paying thousands of dollars less for Medicare, gain an extra $2,400 in annual Social Security benefits. It would cost about $3.1 trillion.
She also has an expected appropriation of $3 trillion for the Green New Deal and $500 billion for housing programs. Warren also has a $1 trillion plan for childcare and early learning subsidies. Annual bills for day care, preschool, and nurseries — which according to Moody’s typically range from about $3,600 to $12,000, depending on income — would be wiped out for households earning up to 200% of the poverty line ($51,500 in 2019 for a family of four). No family would pay more than 7% of income for childcare, for an average savings of about $1,200. That would be especially beneficial to households who earn too much to qualify for Head Start (which typically cuts off at the poverty line) but too little to benefit from childcare tax credits, which are nonrefundable.
Her education plans include $1.2 trillion for lowering college costs and student loans. She wants to provide free tuition and fees at U.S. public colleges, and spend $100 billion more on Pell Grants for lower-income students to help chip away at room and board costs that can average $11,000 to $12,000. She also wants to forgive up to $50,000 in student loans for families with household income up to $100,000 (reduced by 33 cents on the dollar up to $250,000 in income, above which families wouldn’t be eligible). She also would allocate $800 billion to K-12 funding.
To pay for these other plans over the course of 10 years, Warren’s tax program would entail the following moves.
She would raise $1 trillion by reversing the tax cuts received by the wealthiest Americans, such as restoring the top rate back to 39.6%. What is not clear is if she would also repeal all the lower rate benefits for the top 1%, would limit itemized deductions to the lower rates, or repeal the 20% deduction for pass-through qualifying income?
To help Social Security solvency, an additional 14.8% payroll tax rate on wages above $250,000 (2% of taxpayers), split evenly with the employer, would raise $2.1 trillion. Thus, a single taxpayer earning $500,000 of wages would presumably pay 6.2% of Social Security tax on the first $132,900 of wages, 7.4% of Social Security tax on wages in excess of $250,000, 1.45% Medicare tax on all wages, 0.9% of Medicare surtax on excess earned income on wages above $200,000. The self-employed would get hit with double that burden.
There would be an additional 14.8% income tax rate, on top of the existing 3.8%, on net investment income on taxpayers over $250,000 single or $400,000 MFJ, on top of their marginal rate. The thought is this would raise $2.1 trillion. It would be an effective rate of 38.6% on NIIT (which includes capital gains and dividends) given that type of income is currently taxed at 23.8%.
She would restore the corporate tax rate to 35% and impose a new corporate surtax of 7% of GAAP “worldwide profit” if profit exceeds $100 million. The estimate to be raised here is $2.4 trillion.
Other tax revenue streams would come from the following:
- Closing corporate “loopholes” ($150 billion)
- Restoring the prior estate tax exemptions down to $3.5 million; increasing the top rate to 75%; and eliminating the step up in basis at death ($500 billion)
- Eliminating the S corporation payroll tax exemption on S corporation earnings (which will also be affected by the additional 14.8% tax).
Mayor Pete Buttigieg5
[Ended campaign March 1, 2020]
Like Biden, Mayor Buttigieg’s 10-year new spending plan of $5.7 trillion is more modest by comparison.
His health care plan is deemed “Medicare for All Who Want It,” and carries a price tag of $1.5 trillion. He also is proposing to make long-term care more affordable by providing $90 a day to eligible elderly, to eliminate the Medicaid rule that takes your home, and to raise Medicaid’s minimum qualifying asset and income tests and ensure the viability of the Social Security system.
In terms of education, Buttigieg wants $700 billion for prekindergarten and child-care programs for low and middle income families, and assistance for middle-class families for after-school and summer care. He is also looking for $500 billion to make college more affordable. (80% of families making less than $100,000 won't pay for public college. Those making up to $150,000 will have reduced tuition based on a sliding scale.) He is also seeking $200 billion for new job training.
Buttigieg has also proposed the following:
- $430 billion for affordable housing, providing options for another 7 million Americans.
- $2 trillion for climate change plan that is mostly funded with carbon fees.
- Giving stay-at-home parents and caregivers the right to earn Social Security credits.
- An increase in the minimum Social Security payout to 125% of poverty.
- Creation of “public option” 401(k)s to which employers would have to contribute 3%
Buttigieg’s more modest plans would be funded by the following tax initiatives:
- $400 billion tax cut through increasing the earned income tax credit. He estimates take-home pay will rise by $1,000 for 35 million families.
- An increase in the capital gains tax on the top 1%.
- Elimination of the Trump tax cuts for upper income taxpayers.
- A rollback of the corporate tax cut to raise enough to fund the Medicare for All Who Want It plan.
- Increase payroll taxes on individual workers making more than $250,000.
- Greater tax enforcement on the wealthy
Mayor Michael Bloomberg6
[Ended campaign March 4, 2020]
Mayor Bloomberg released his tax plan on Feb. 1. According to his campaign website, the tax plan can be broken down into five major initiatives:
- Raise rates for high-income taxpayers: This would be accomplished by reversing the TCJA rate cuts on high-income earners and restoring the highest rate from 37% to 39.6%.
- A new tax on the very rich: There would be a 5% surtax on all income, earned and unearned, for income levels above $5 million.
- Capital income taxed more equitably: Capital gains would be taxed at the same rate as ordinary income for all taxpayers above $1 million. According to Bloomberg News, Bloomberg would also end the basis step up at death and lower the estate tax exemption amount.
- Reform the estate tax and close loopholes: Repeal the 20% QBI deduction on pass-through businesses, and repeal like-kind exchange for real estate assets. According to Bloomberg News, Bloomberg will work on mitigating the loss of the 20% QBI deduction on small businesses.
- Raise corporate taxes: Bloomberg’s plan would raise the corporate tax rate from 21% to 28% and increase the minimum tax rate (currently effective 10.5% ) on excess foreign earnings, applying it on a per country basis instead of the current global basis. He would also increase IRS funding for enhanced tax compliance, tighten transfer pricing rules, increase transparency of all foreign taxes paid, attack the shifting of profits to foreign tax havens, and, in short, have the United States take the lead on international efforts in the Organisation for Economic Co-operation and Development (OECD) to defeat profit shifting to low-tax countries.
According to Bloomberg News, the tax plan is expected to raise $3 trillion to $5 trillion to fund his social policies, which address health care ($1.5 trillion), infrastructure ($1.2 trillion), student loan modifications and tuition assistance ($700 billion), global warming, and affordable housing.
Perhaps some, if not all, of these contenders will remain in the field come April 28. In the meantime, consider the proposals above and their related costs. And make sure you register and vote.
Robert Duquette, CPA, is professor of practice in the College of Business at Lehigh University, a member of the Griffin/Stevens & Lee Tax and Consulting Network, and a retired EY tax partner. He has served on PICPA’s Federal Taxation Committee for over 25 years, focusing on federal tax reform and the national debt.
Sign up for weekly professional and technical updates in PICPA's blogs, podcasts, and discussion board topics by completing this form.