How the candidates’ tax proposals highlight different economic priorities

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JUDY WOODRUFF: Few things are certain in life, and this year’s presidential campaign has certainly defied tradition. But when it comes to taxes, it’s become clear there are pretty big differences between the two major party candidates.

Lisa Desjardins reports. It’s part of our ongoing look at issues shaping this election.

LISA DESJARDINS: Taxes, among the most powerful of government policies, affecting how we live and work every day. This week starts the first head-to-head policy speeches between Hillary Clinton and Donald Trump, starting with Trump Monday.

DONALD TRUMP (R), Presidential Nominee: I am proposing an across-the-board income tax reduction, especially for middle-income Americans.

LISA DESJARDINS: Trump’s plan? He would simplify the tax system to just three smaller rates and fewer deductions. His top rate would be 33 percent vs. the current 39.6 percent. We don’t yet know who would see which rates.

He’s more specific on the estate tax. That’s the tax on inheritances over $5.4 million. Trump would eliminate that tax altogether, a big benefit for farmers and wealthy families. Republicans say it is fair and positive.

Hillary Clinton, in her economic speech in Michigan today, could not have disagreed more.

HILLARY CLINTON (D), Presidential Nominee: Multimillionaires shouldn’t be able to pay a lower tax rate than their secretaries.

(APPLAUSE)

LISA DESJARDINS: Clinton would charge a minimum 30 percent tax on incomes over a million dollars, and she’d raise the total tax rate to 43.6 percent for those making over $5 million. Clinton wouldn’t change rates for the lower or middle classes.

Clinton charges that Trump’s tax plan is a giveaway to the wealthy, especially one big change.

HILLARY CLINTON: In his speech on Monday, he called for a new tax loophole — let’s call it the Trump loophole — because it would allow him to pay less than half the current tax rate on income from many of his companies.

LISA DESJARDINS: Clinton is talking about something complicated, but important, called pass-through income. Here’s how it works.

Classically, a business pays a 35 percent rate on taxable incomes. But some businesses, where the owner or family is the business — think about attorneys with their own firms, for example — can pay using what’s called a pass-through. In that case, the business doesn’t pay a corporate tax. Instead, the company pays the owner and the owner pays an individual income tax of up to 39.6 percent.

This exists so the owner isn’t taxed twice, as a business and individual. Donald Trump’s plan would cut all corporate taxes to 15 percent. And he would set a new 15 percent rate for these pass-through incomes, a huge cut that could apply to his own businesses. He responds that Clinton and Democrats overtax companies.

DONALD TRUMP: All Hillary Clinton has to offer is more of the same, more taxes, more regulations, more bureaucrats, more restrictions on American energy and on American production.

LISA DESJARDINS: Different visions, Trump offering tax cuts to all, especially the wealthy, Clinton pledging to tax the wealthy more and to use that money for programs for the middle and lower classes, including targeted tax credits.

For the “PBS NewsHour,” I’m Lisa Desjardins.

JUDY WOODRUFF: Clearly, there are still many other details to both of their plans, but let’s focus in on some of the bigger differences of their approaches to taxes with Neil Irwin. He reports on business and economic issues for The New York Times. And David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, and a contributing correspondent for The Wall Street Journal.

And we welcome both of you back to the program.

So, I think both of you agree with what we have just been hearing. The biggest differences between Clinton and Trump are over how their tax plans treat the wealthy.

David, spell that out a little more for us. What’s the difference?

DAVID WESSEL, Brookings Institution: Well, Hillary Clinton has a very clear strategy of increasing taxes on the wealthy.

She would increase the estate tax. She would increase, as Lisa’s piece said, the marginal income tax rate on the highest income earners. Trump, on the other hand, would lower taxes for pretty much everybody, but he would disproportionately lower them for people at the top. And he would do away with the estate tax.

So, in a sense, she wants to use the tax code to narrow the gap between winners and losers in our economy, and he doesn’t make that a priority. He wants to lower taxes and says that that will somehow unleash a burst of economy growth.

JUDY WOODRUFF: And, Neil, remind us, how do we define wealthy here? What income levels are we talking about?

NEIL IRWIN, The New York Times: Well, with Hillary Clinton, the biggest surcharge is for people making over $5 million a year. That’s the very, very wealthy.

But she has some other provisions that affect people a little further down the income scale, some provisions that make sure people making over $1 million pay at least 30 percent. That includes — so that deals with the issue that Warren Buffett has talked about where some secretaries, middle-class people can end up with effectively a higher rate than people who make their income through capital gains.

So, it’s kind of a multitiered effort she’s doing to use some different dials within the tax code to try and shift overall the burden a little heavier toward the affluent.

JUDY WOODRUFF: Now, in connection with that, David, let’s talk about what the two of them would do when it comes to corporations and businesses. And I know there’s a lot here, you know, we could focus on. But, mainly, what are the differences between the two?

DAVID WESSEL: Well, the main difference is that Donald Trump wants to cut the tax on businesses, and she doesn’t.

It’s pretty simple like that. She has a number of targeted tax breaks for businesses to encourage them to do things that she and her advisers think would be good for the economy, more apprenticeships, more profit-sharing. But he is willing to cut the rate, allow them to write off a lot more stuff more quickly.

Now, one advantage he has, he doesn’t pay for any of this stuff. So she’s very carefully, you increase this, you cut that. She’s not making the long-term deficit better, but she’s not making it worse. He seems unconcerned with that, so he can give a lot more tax breaks.

JUDY WOODRUFF: So, revenue overall to the Treasury, to the government would go down under his proposal?

DAVID WESSEL: A lot, yes, trillions of dollars.

JUDY WOODRUFF: Neil, be a little bit more specific on that, Neil, because we have talked about — Lisa referred to something called the pass-through, where if somebody owns a business, they — again, without confusing everybody, what does that really, effectively mean?

NEIL IRWIN: It’s kind of a big deal.

Donald Trump talks about doing a 15 percent rate on business income, not just corporations like Apple or GE, but also on small businesses, including partnerships, including if I have a sole proprietorship, if I have a small partnership, he wants a 15 percent rate on that income as well, which means it creates great incentive — if you’re a wealthy person looking at a 40 percent rate in the current tax code, 33 percent under Trump’s plan, you can actually get that down to 15 percent if you can somehow route that income through a business, through a partnership.

And what we will see if that happens is a lot of people trying to do that.

DAVID WESSEL: Right.

So what’s interesting is if you’re a wage-earner, if you get a paycheck from your boss, there’s no way you’re going to be able to take advantage of this. But if you can somehow turn yourself into a little company, a lawyer who is a partner, or you’re some kind of a baseball player who says, I’m now I’m — I’m David Wessel, Incorporated, then I can take advantage of this.

So a whole set of people, if they can organize themselves as businesses, can take advantage of this. Ordinary wage-earners can’t.

JUDY WOODRUFF: And is it expected that that would happen, Neil?

NEIL IRWIN: It is. The government — the law can try and do things to try and fight it.

But we already see some of this that happens to avoid payroll taxes. It is clearly one of the issues that will have to be resolved.

JUDY WOODRUFF: In connection with this, we often hear Donald Trump talk about corporate tax rates are way too high in this country.

The effective rate, though, David, as I understand it, is lower than what the number is. People end up paying less, or companies end up paying less than what they are charged on paper.

DAVID WESSEL: Right.

So, the statutory rate, the rate in the law is 35 percent, but when you look at all the deductions and credits and exclusions that we give businesses, the effective rate, on average, is much lower than that, in the 20s.

For some companies, it’s higher. Some companies, it is lower. So, there is a lot of momentum in Washington to redo the corporate tax code, take away some of these deductions and credits, and lower the rates.

It’s been very politically difficult because there are winners and losers. And actually neither candidate has gotten very specific about how they do that.

JUDY WOODRUFF: Well, I want to ask you both about the middle class, people earning less than what the wealthy do.

But before we do, Neil, what about changes in the estate tax? This is the tax people are charged when they die. They pass on everything they have to their children and there’s a tax associated with that. How do Clinton and Trump deal with that?

NEIL IRWIN: Well, with Trump, it’s simple. He wants to get rid of it entirely.

And one thing to remember, right now, the cutoff there for a married couple, it’s $10.9 million, meaning you have to be a multimillionaire when a person dies to face that tax at all. He still wants to get rid of it.

Hillary Clinton wants to go the other direction, reduce those exemptions down to $7 million for a married couple. So it would affect more people than it does now if Hillary Clinton got her way.

JUDY WOODRUFF: And, again, what would the effect be on revenue, David?

DAVID WESSEL: Well, we don’t get a lot of revenue from the estate tax.

We know the direction. But I think what Neil says is really important. So, of every 1,000 people who die in a given year, only two of them face the estate tax. So, it affects only the very rich. It’s almost more of a talking point than it is a real tax policy.

JUDY WOODRUFF: We often hear Republicans refer to it as the death tax.

DAVID WESSEL: Right. Right. I don’t why they do that.

(LAUGHTER)

JUDY WOODRUFF: Let’s talk about, Neil, the middle class, and let’s be clear about what bracket, what income bracket we’re talking about, because, again, we see differences between the two of them and what they would do with the tax rates.

NEIL IRWIN: Yes.

So, Donald Trump does have a middle-class tax cut. It’s fairly small. It’s moving one of the key brackets from 15 percent to 12 percent. One estimate, the proposal his is based on would cut after tax income for middle-class families by something like 0.2 percent, something like 5 percent for the richest 1 percent.

So, he does have that tax cut in there. Hillary doesn’t. The question, though, is, is the scale that they’re talking about something that is going to really move the dial and change living standards for middle-class Americans? And the numbers just aren’t that big.

JUDY WOODRUFF: And we should say, David, that Trump has been saying the last several days that Clinton favors raising taxes on the middle class. She says absolutely she does not.

DAVID WESSEL: Right. In her — in the proposals she has laid out, she doesn’t raise taxes on the middle class.

JUDY WOODRUFF: So, how do you single out the differences there on what happens to the middle class?

DAVID WESSEL: Well, as I said, because Trump is cutting taxes for a lot of people and not paying for it, he’s able to offer some tax cuts, like the one Neil described.

Hillary Clinton has some targeted tax cuts, like increasing the tax break for child care, which she has now responded to in a vague and evolving way. I think, when you step back, what Hillary Clinton is really saying is, look, some people are going to have to pay more taxes. I’m going to come up with a plan that puts all those tax increases on people who make more than $250,000 a year. I’m not going to be able to do very much for people who make less than that. I’m not going to cut their taxes much, but I’m also not going to raise them.

JUDY WOODRUFF: What would you to do that, Neil? And we should say that whatever candidates say during a campaign is not always necessarily what they can get passed once they’re elected.

NEIL IRWIN: That’s always true.

There is also some stuff on child tax credits. Hillary Clinton talks about it as a credit that would help a lot of middle-class, lower-income families afford child care. Donald Trump wants to do it as a deduction. That would mainly apply to the wealthiest Americans, upper-middle-class families. So, that’s another key distinction in this.

DAVID WESSEL: We should mention that they both talk about college and student loans in different forms.

Hillary is talking about making college debt-free. And so that would obviously be things that are targeted to the middle class. But I think Hillary Clinton is also saying, look, I want to spend a lot of money on pre-K and infrastructure, and that will help people get jobs and higher wages.

JUDY WOODRUFF: Well, there is a whole lot to look at with their economic plans. This has taken a big bite out of it.

And we thank you both, Neil Irwin, David Wessel.

DAVID WESSEL: You’re welcome.

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