Democratic presidential frontrunner Hillary Rodham Clinton is promoting tax measures that would increase federal revenues by $1.1 trillion over the coming decade, according to a new analysis. Compared to Republican plans, which typically cut taxes, her proposal could help stabilize the nation’s ballooning debt if she also finds a way to reduce existing government spending.
Clinton’s proposals for boosting taxes on high-income earners, modifying taxation of multi-national corporations, doing away with fossil fuel tax incentives and increasing the estate and gift taxes would fall hardest on the top 1 percent of taxpayers, while leaving 95 percent of Americans relatively unscathed, according to an analysis released on Thursday by a joint venture of the Urban Institute and the Brookings Institution.
Clinton’s tax plan, including some leftover ideas from the Obama administration, would almost certainly encounter stiff opposition from the GOP controlled Congress which opposes any tax increases. Moreover, Clinton has advanced a raft of high-priced plans for the middle class – including relieving college tuition costs and expanding healthcare, family leave and energy production – that would more than offset the $1.1 trillion of new revenue over the coming decade.
While Clinton’s tax proposals are still a work in progress and could end up being more costly, the report says there is little doubt that the wealthiest Americans would be hardest hit by soaring marginal tax rates that would “reduce incentives to work, save and invest.” The 40-page report doesn’t venture a guess as to the long-term effect of these tax increases on the overall economy. However, they would almost certainly slow the growth of the Gross Domestic Product if enacted unless Clinton’s ambitious domestic proposals succeeded in generating new jobs and economic activity.
Len Burman, director of the Urban-Brookings Tax Policy Center, told reporters today on a conference call that his organization hasn’t conducted a full macro-economic analysis of Clinton’s plan yet, and probably won’t until later this year after the Clinton campaign unveils other proposals for providing tax relief to middle and lower-income Americans.
“I think a standard macro-economic model would show probably a small reduction in economic output from the rising marginal tax rates,” he said. “The actual effect is a little complicated because it depends not only on how it affects changes to work, savings and investment . . . but it also depends on what the money is spent for.”
Clinton, the former secretary of state and first lady, unveiled her tax proposals on March 3. Among her proposals:
- A 4 percent surcharge on adjusted gross income above $5 million.
- A 30 percent effective tax rate on adjusted gross incomes greater than $1 million – the so-called “Buffett Rule” that would guarantee wealthy people pay tax rates at least as high as those of lower-income people.
- An increase in the estate tax and limiting the tax value of specified deductions and exemptions to 28 percent.
If these and scores of other proposals were approved, taxpayers in the top 1 percent of the income distribution, with annual incomes above $730,000, would see their tax burdens increased by more than $78,000, according to the report. That would amount to a reduction in after-tax income of 5 percent. By contrast, most Americans who earn less than $300,000 a year would see little change in their average after-tax incomes.
According to the study, Clinton’s proposals would increase federal revenue by $1.1 trillion over the first 10 years of the plan and an additional $2.1 trillion over the following decade. The top 1 percent of U.S. households would be obliged to pay more than three quarters of the total tax increase.
The combination of the 4 percent surtax on adjusted income over $5 million and the new 30 percent minimum tax would effectively drive up the average marginal tax rate on all forms of capital income for the wealthiest Americans and discourage investment, according to the report. For instance, the average marginal tax rate on interest income would shoot up by 4 points – from 36.8 percent to 40.7 percent – within the very highest income tier. Meanwhile, the effective marginal tax rate on dividends would rise from 24.0 to 30.3 percent.
Clinton’s tax proposals contrast sharply with those of her Democratic rival, Sen. Bernie Sanders of Vermont, as well as billionaire Donald Trump and the two other remaining major GOP candidates, Sens. Ted Cruz of Texas and Marco Rubio of Florida.
Sanders, the self-described democratic socialist, has advanced a soak-the-rich tax plan that would raise taxes by $13.6 trillion over the coming decade to help pay for his proposals for universal government health care, free college tuition and other measures, according to an analysis by the non-partisan Tax Foundation. Sanders is seeking the largest tax hike in modern times, one that would boost the top marginal income tax rates to 54.2 percent and likely slow the growth of the economy by 9.5 percent in the long-term, according to the analysis.
On the Republican side, Trump, Cruz and Rubio have all proposed major tax reforms to spur economic growth, but all at enormous potential costs to the Treasury. Trump’s plan, for example, would drain the federal coffers of $9.5 trillion over the first decade and another $15 trillion over the second ten years, according to a separate Tax Policy Center study.
Cruz’s revolutionary idea to switch from the current federal tax code to a simple, European-style “flat tax” would add $8 trillion to the deficit over the coming decade, according to a new study by the Committee for a Responsible Federal Budget. And Rubio’s tax cuts and simplification plan would reduce federal revenues by $6.8 trillion over a decade, according to the Urban-Brookings Tax Policy Center.
“Those are really big deficits,” Burman said today in raising a red flag about many of those proposals. “And I think it’s safe to say . . . if there were not pretty big spending cuts to offset those deficits, the deficits would have a negative effect on the economy. The way that works is, the government borrows more and more money and pushes up interest rates, which actually makes the government’s problems even worse in the ways we didn’t explicitly reflect in our analysis.”