Major Policy Issue No. 2: Taxes

This is the second analysis of policies proposed by our presidential candidates. No. 1 was about trade. This one is about taxes.

Both candidates like to spend but have different ideas about how to raise revenues. Kamala Harris wants more revenue from taxation. Donald Trump favors less taxes but believes lower taxes would lift the economy and yield more revenue. 

Because both candidates are pandering to voters their proposals are a moving target. But this is what they are saying this week. They may change. 

As you know taxes are a complicated mess so I will try to keep it simple. 

Income Taxes

In 2017, Trump passed the Tax Cuts and Jobs Act (TCJA) which lowered tax rates. The top individual tax rate is now 37%. He wants to keep them at that level. Harris would increase it to 39.6% for those with taxable income of more than $400,000.

Harris would also raise the Obamacare tax on investment income to 5% on those with incomes of more than $400,000 ($450,000 for joint filers). Presently it is 3.8% for those with more than $200,000 ($250,000 for joint filers).

Both candidates wish to keep the standard deduction at $12,000 for single filers and $24,000 for joint filers.

Trump proposes to eliminate taxes on social security income. Harris will exempt such income from taxes for those with incomes less than $400,000.

Trump has proposed exempting tip income from income and payroll taxes. Harris proposes the same but has said she will focus on lower-income service and hospitality workers.

Capital Gains Tax

Currently the top capital gains tax rate is 20% plus the 3.8% Obamacare tax, or 23.8% total. Harris would increase that rate to 28% plus 5% tax for Obamacare, and 33% total for taxpayers with taxable income of more than $1,000,000. Trump would keep current rates.

Wealth Taxes

Harris proposes a 25% minimum tax on total income and unrealized capital gains for taxpayers with a net worth exceeding $100,000,000. Taxes on unrealized capital gains would be credited against future realized capital gain taxes. Annual reporting would be required. The details on how this would be accomplished are lacking.

Trump opposes a wealth tax.

Estate Taxes

The 2017 Tax Cuts and Jobs Act (TCJA) made substantial changes to estate (i.e., death) and gift taxes. Estates with a value of $13.6 million are currently exempt from taxes. A married couple, for example, would have an exemption of $27.2 million. The maximum tax rate is currently 40% of a taxable estate in excess of the exemption. 

Trump wishes to keep the rates and policies as set in the 2017 Act. He opposes Harris’s changes.

Harris has proposed substantial changes to the estate tax. The Tax Cuts and Jobs Act (TCJA) expires after 2025, and the estate tax exemption reverts back to $5 million ($10 million for joint filers). Harris supports a Senate bill that would further reduce the exemption to $3.5 million.

Harris also would impose a progressive estate tax starting at 55% for estates up to $13 million, then 60% for $13 million to $93 million, then 65% for estates of more than $93 million. If your estate is more than $1 billion, then it’s 75%.

Another major change is Harris’s proposal to eliminate the stepped-up basis provision which allows a beneficiary who inherits an asset to treat the asset’s cost basis as of its value at the decedent’s date of death (or up to 6 months later). Thus a beneficiary could sell the asset at today’s value and pay no capital gain tax. The Harris proposal would treat the decedent’s cost basis as the beneficiary’s cost basis at the date of death for capital gains purposes. If dad bought Apple stock for $1.15 per share in 1990 the beneficiary’s basis is $1.15 even though the stock today is worth $225 today.

Annual gifts of up to $18,000 per donee are currently exempt from taxes. Harris supports a $10,000 per donee cap with $20,000 a year total donor cap on all gifts.

Corporate Taxes

The 2017 Tax Cuts and Jobs Act (TCJA) reduced the corporate tax to a maximum of 21%. Trump favors a 20% rate. He has also suggested it could be as low as 15% for companies that manufacture their products in the USA.

Harris would raise the corporate tax to 28%. 

Conclusion

There are two conflicting ideologies here. Harris represents the “tax the rich” party. Trump represents the “low tax, more prosperity” party. 

First, let’s look at who pays taxes. 

Here is the latest IRS available data compiled by the Tax Foundation (2021).

The top 1% of taxpayers pay 45.8% of all income taxes. The top 10% pay 76% of income taxes. Here’s a startling number: the top 0.1% (only 153,590 taxpayers) pay 24.7% of income taxes.

It is misleading to say the “rich” aren’t paying their fair share of taxes. Without the “rich” – the successful entrepreneurs who have created jobs for millions and changed our lives for the better – who would fund the government? 

What these numbers show is that we have a very fragile tax system that relies on the few to carry the many.

What Harris is missing are the unintended consequences of high taxes on successful people and companies. That is, soaking the rich deters savings and investment, and less investment means fewer businesses and fewer jobs. Ultimately it leads to economic stagnation. This is class warfare and, while it has been tried many times, it has never worked.

For policies that would create more prosperity, Trump’s tax proposals are far from perfect, but they are much better than Harris’s.