The individual income tax has never taxed the very wealthy much. Donald Trump may have claimed huge losses starting in the early 1990s, but, like other rich investors, he wouldn’t have paid much tax regardless. Despite paying some tax, Warren Buffett’s release of his 2015 tax return affirms that conclusion.
There are two major reasons: first, paying individual income taxes on capital income is largely discretionary, since investors don’t pay tax on their gains until they sell an asset. Second, taxpayers can easily leverage capital gains and other tax preferences by borrowing, deducting expenses, and taking losses at higher ordinary rates while their income is taxed at lower rates. Such tax arbitrage is, in part, what Trump did.
To be fair, some, like Buffett, live modestly relative to their means and still contribute most of what they earn to society through charity. Some pay hefty property and estate taxes and bear high regulatory burdens. And salaried professionals and others with high incomes from work, whether wealthy or not, may pay fairly high tax rates on their labor income. Still, there are many ways for the wealthy to avoid reporting high net income produced by their wealth.
The phenomenon is not new. In studies over 30 years ago, I concluded that only about one-third of net income from wealth or capital was reported on individual tax returns. Taxpayers are much more likely to report (and deduct) their expenses than their positive income. In related studies, I and others found that rich taxpayers reported 3 percent or less of their wealth as taxable income each year.
But your favorite billionaire did not get that way by earning low single-digit returns to his wealth. Buffett’s 2015 adjusted gross income (of $11.6 million) would be around one-fiftieth of 1 percent of his wealth, which in recent years has been estimated to be near to $65 billion. Yet, over the past five complete calendar years, Buffett’s main investment, Berkshire Hathaway, has returned an average of over 10 percent annually.
The wealthy effectively avoid paying taxes on those high returns either by never selling assets and thus never recognizing capital gains, deferring income long enough that the effective tax rate is much lower, or by timing asset sales so they offset losses, as Trump likely has been doing to use up his losses from 1995.
When you die, the accrued but unrealized gains generated over your lifetime are passed to your heirs completely untaxed, though estate tax can be paid by those who, unlike Buffett, don’t give most away to charity.
“Tax arbitrage,” the second technique, is simple in concept though complex in practice. It allows an investor to leverage special tax subsidies just as she’d arbitrage up any investment—in this case, to yield multiple tax breaks. If you buy a $10 million building with $1 million of your own money and borrow the other $9 million, you’d get 10 times the tax breaks of a person who puts up $1 million but, because she doesn’t borrow, buys only a $1 million building.
The law limits the extent to which most people can use deductions and losses from one investment to offset income from other efforts, but “active” investors are exempt from most of those restrictions. In real estate it is quite common for the active individual or partner to use the interest, depreciation, and other expenses from a new investment to generate net negative taxable income to offset positive income generated by other, often older, investments.
The main trick is simply to let enough income from all the investments accrue as capital gains. For example, take a set of properties that generate $1 million in rents and $500,000 in unrealized appreciation. If expenses are $1,200,000, net economic income would be $300,000 ($1,000,000 plus $500,000 minus $1,200,000); but net taxable income would be a negative $200,000 ($1,000,000 minus $1,200,000) since the unrealized appreciation is not taxable income.
Real estate owners enjoy other tax benefits as well. They can sell a property without declaring the capital gain by swapping the asset for another piece of real estate—a practice known as a “like-kind” exchange. Often, when a property changes hands it ends up being depreciated more than once.
At the end of the day, tweaks to the individual income tax system, including higher tax rates, are unlikely to increase dramatically the taxes paid by the very wealthy. Instead, policymakers need to think more broadly about how estate, property, corporate, and individual income taxes fit together and how to reduce the use of tax arbitrage to game the system.
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Hillary Clinton and Donald Trump have proposed major changes to US tax policy, but they have dramatically different visions of what the tax code should look like, who should pay, and how much. How much tax you’ll owe and the size of the future national debt could depend on who wins in November.
But how much do you know about what the candidates want to do about taxes? Test your knowledge with the Tax Policy Center’s Presidential Candidate Tax Quiz.
Our eight-question quiz asks about the tax changes Clinton and Trump have proposed, how those changes would affect the amount of tax different income groups pay, and how those changes would affect federal revenue. (If you want to study before taking the quiz, here are a couple of cheat sheets that might help: federal taxes are progressive and the federal government gets most revenue from income taxes and payroll taxes.)
After you answer each question, we’ll explain why you got it right or wrong and at the end of the quiz, we’ll give you a final score. Share it with your friends on Twitter and Facebook.
All questions and answers are based on our updated analyses of Donald Trump’s and Hillary Clinton’s tax proposals. Whether you aced the quiz or need to study up, be sure to check out those reports for more details on each candidate’s proposals.
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Americans feel the wide gap between needed infrastructure investment and the funds available for it. Families in Cedar Rapids, Iowa face flooding, children in Flint, Michigan are still drinking bottled water, and Washington, DC commuters face regular breakdowns in public transit.
So it’s no surprise that the presidential candidates have started talking infrastructure. Clinton released her plan almost a year ago. Trump’s announcements last month about his plan to “build the next generation” of infrastructure provides us with the first opportunity to compare.
How much of an investment?
The shared sentiment in both plans is that the infrastructure gap is a major current and future crisis, and that it’ll take a lot of money to fix. Clinton proposes $300 billion in total investment over five years starting in the first 90 days of her term. She supplemented that proposal with related ones of different costs, such as expanding residential solar energy production.
Trump is thinking even bigger. He proposes to “at least” double Clinton’s proposed investment—a value that would come closer to meeting the expected gap and match former candidate Bernie Sanders’s infrastructure proposal.
Both candidates’ platforms would ostensibly yield the expected usual returns from infrastructure investments: jobs, improved services, broader service access, reduced transactional costs, improved household finances and health, and the overall productivity benefits to the country.
But Clinton and Trump’s proposal similarities end at the big-ticket purchase.
What does this investment get us?
Clinton has prioritized fixing existing transportation (filling in the potholes), expanding public transit and consumer broadband, and modernizing freight transport, airports, energy grids, and water supply and waste distribution. Included in this list of individual infrastructure pots is a more global reconsideration of how current formulas allocate federal funding to better target local needs. She also proposed earmarking $50 billion of the $300 billion to traditionally underserved communities after the Flint water crisis. My colleague, Tracy Gordon, discussed Clinton’s plan last year.
In comparison, Trump painted a broad brushstroke of need among “roads, bridges, railways, tunnels, seaports, and airports.” His campaign has promised a detailed plan since last month’s announcement, but has not released one. If the recent debate provides any clues about Trump’s infrastructure priorities, though, airport modernization may be an early priority.
How do they pay for it?
Clinton’s plans rest squarely on public resources, with the $300 billion preliminary investment embedded in her wider tax and expenditure plans. She proposes $275 billion in direct spending, plus a $25 billion infrastructure bank advised by an independent board of experts to approve lending and loan guarantees that could leverage another $225 billion in financing. One proposed source of the $300 billion would be a tax overhaul for companies with foreign assets.
Trump proposes taking advantage of current low interest rates to issue infrastructure bonds—essentially borrowing money to cover the proposed bills. Presumably the impending proposal would detail just how these bonds would be issued and repaid.
The next step we may see is Trump’s campaign releasing more details on what and how he proposes spending infrastructure dollars allowing additional comparison between his and Clinton’s plan.
An additional complexity is the difficulty in getting any major spending initiative approved by future congresses. This challenge will be difficult to overcome for either candidate—and it’s one that neither plan takes into account yet.
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With great fanfare, Donald Trump has proposed a new plan to help families pay for child care. However, the proposal, which is a revised version of an idea he rolled out in August, would mostly benefit high-income families who need government child care subsidies the least. For those who need it the most, such as low-income married couples with a single earner, there is much less to Trump’s plan than meets the eye.
His plan has three major pieces: a child care savings account, a new deduction that could even help high-income families with no paid child care, and a separate credit for some low-income families.
First, let's look at the dependent care savings account. Yes, we already have one in the tax code, although few people use it. Firms offer the plans to less than one-third of all US workers. High income families tend to benefit the most. (Middle income families tend to benefit from the child care credit and low-income families benefit from neither.)
Trump wants to double-down on the savings account idea, however. Families can contribute up to $2,000 per account – even if a child has not yet been born. No other tax-advantaged savings plan would be as generous. Contributions would not be taxed and accounts would grow tax-free. It would be like the best of a traditional IRA and a Roth IRA wrapped into a single account.
Some very high-income families will be very excited about this new tax shelter. But while low-income families could get a match of up to $500 on a $1,000 contribution, Trump has left out many key details such as when the government would make the match and how long a worker would have to keep the money in the account in order to qualify. Some low-income families, presumably, would not have enough money to take advantage of these accounts. Plus, those facing very low tax rates would receive little tax benefit from the accounts.
Next, Trump is proposing an above-the-line tax deduction for child care expenses. The maximum deduction would be based on the average cost of child care in the taxpayer’s state. (No, we do not know if this calculation would vary by age of child – a large factor in determining actual costs.)
It makes some sense to avoid taxing people on expenses associated with going to work. But Trump’s plan would also give a deduction to parents who incur no child care costs.
The way Trump has designed his plan, benefits from the deduction would go disproportionately to high-income families. For starters, many low-income families already pay no federal income tax. Their income is below their standard deduction and personal exemptions or they already have credits that offset their taxes owed. Thus a new deduction does nothing to raise their after-tax income.
If they do owe income tax, they pay at the 10 or 15 percent rate, and the deduction saves them just 10 or 15 cents on the dollar. For a top-bracket taxpayer, a deduction reduces their tax liability by 39.6 cents on the dollar.
To address that problem, Trump offers the third piece of his plan, a special benefit for very low-income families that would increase an eligible family’s EITC by almost $1,200 per year.
As explained here, families would get a credit worth up to half of the payroll taxes paid by the lower-earning parent. This is important. While the campaign makes a point of saying the deduction goes even to stay-at-home parents, it's not so for low-income couples where one parent stays at home.
Keying the credit to the lower earning spouse means that if you’re low-income and one spouse doesn’t work – you get no credit (since the lower-income spouse owes $0 in payroll taxes). The campaign says if you are eligible as a single parent or a family with two working parents and earn $31,200 – you would get the maximum credit of $1,200. That’s a credit of a paltry 3.8 percent – hardly enough to make a dent in child care costs.
I already lament the confusing nature of the two child care tax benefits we currently have. And Trump would add three more.
Finally, no column on child care tax benefits would be complete without mentioning that childcare costs are typically incurred over the course of the year. Thus, a benefit that doesn’t come until taxes are filed offers little help to cash-constrained families. Trump might be talking about helping people pay for child care, but higher income families clearly stand to gain a lot more than their low-income peers.
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Republican vice presidential nominee Mike Pence’s recently released tax returns attracted attention for how little tax he paid: just $6,956 in federal income tax on $115,526 in total income, a rate of 6 percent. Pence’s tax bill would have been 72 percent higher had it not been for $5,000 in higher education tax credits enacted under Presidents Clinton and Obama, which have been increasingly demonstrated to be ineffective and regressive.
Tax credits that help offset the tuition paid by college students and their families have been in place since 1997, and were significantly expanded in 2009. These credits are available to married-couple families with incomes up to $180,000 ($90,000 for single-parent families), with varying formulas and eligibility rules for each of the credits. They totaled $17.5 billion in 2013, more than half the size of the Pell grant program for low-income students.
The availability of these tax credits to families with relatively high incomes combined with the fact that children from higher-income families are more likely to go to college means that the credits disproportionately benefit higher-income households. An analysis of the 2009 tax returns of households with 19- and 20-year-olds by George Bulman and Caroline Hoxby showed that the top third of families in terms of income (those making more than $70,000) reaped 62 percent of the benefits of these credits. Families in the middle third got 31 percent. The bottom third of families—those making less than $30,000 per year—got a paltry 7 percent.
The regressive distribution of education tax credits among families with traditional-age college students is offset to some degree by the use of credits by older college students, who tend to come from lower-income families. And the distribution of benefits might be tolerable if the credits at least accomplished their goal of getting more people to enroll in and graduate from college. But Bulman and Hoxby also find that the tax credits have zero or very small effects on college enrollment and the type of college attended.
The ineffectiveness and regressive nature of federal education tax credits appears unlikely to change. A new study found that providing families with better information on the tax credits had no impact on their likelihood of applying to or enrolling in college. In other words, the ineffectiveness of the tax credits at promoting educational attainment does not appear to be due to a lack of understanding about their existence or how they work.
Higher education tax credits are politically popular, likely due to the fact that they are distributed to a wide range of families in terms of income. That may be why neither of the 2016 presidential candidates has released a plan to reform or eliminate them. Such a change may only be possible as part of a broader bipartisan effort at tax reform led by liberals who desire a more progressive distribution of education benefits and by conservatives focused on reducing government waste of taxpayer dollars.
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Republican presidential candidate Donald Trump summarized his point of view about immigration in a speech in Arizona this week: “There is only one core issue in the immigration debate, and that issue is the well-being of the American people.”
Trump presented a clear “us” versus “them”: the American people on one side, and immigrants on the other. The problem with this rhetoric is that the American people are by definition comprised of immigrants and descendants of immigrants. One in four Americans currently are first- or second-generation immigrants. And even those in the third and higher generation very often live with foreign-born family members, or work, study, pray, or parent alongside immigrant community members.
Among the 13 percent of American residents who are immigrants, the majority are in the United States legally (74 percent). The largest subgroup of legal immigrants, 42 percent of all foreign-born, are naturalized US citizens who have passed an English and civics exam and sworn their allegiance to the country.
Legal permanent residents (green card holders), who most often intend to stay in the country, make up 28 percent of all immigrants, and those on temporary visas comprise less than 5 percent. The remainder or 26 percent of all foreign-born residents (around 3 percent of the total US population) are not authorized to be living in the United States.
The undocumented are also inextricably connected to US citizens and legal immigrants. They share households with an estimated 8.7 million US citizens and legal immigrant family members. A majority of undocumented immigrants have been in the country for 10 years or more, and have woven themselves into the fabric of US communities.
Simple dualities, “us” versus “them,” do not capture this reality of communities all over the United States, where Americans have more and less direct immigrant ties. In the Los Angeles metro area, nearly 60 percent of children have a foreign-born parent, while in the St. Louis metro, that share is 8 percent. Some of the most economically vibrant areas of the country are those with highest immigrant shares, while some of those areas with low immigrants and economic strain are clamoring to entice immigrants to join their communities.
Nationally, immigrant workers make up one-sixth of our workforce, and are disproportionately likely to be entrepreneurs, contributing to the vitality of the country. One-quarter of students in US schools—that is, the country’s future workforce, parents, and voters—are children of immigrants. More than half of recent marriages among immigrants were to a US-born partner. And immigrants from around the world are serving in the US military, spurring technological innovation, and diversifying and enriching the country’s cuisine, music, business, art, and research.
Yes, the well-being of the American people should be a very top priority for our nation’s leaders. The American people, no matter when our families arrived, widely cherish our history of immigration, which has shaped and continues to shape “us.” Our next president should value this immigration reality too.
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Presumptive Republican presidential nominee Donald Trump’s tax plan would slash taxes for individuals and businesses. Trump would quadruple the standard deduction to $50,000 for couples ($25,000 for singles) and collapse the current seven individual income tax brackets, which range from 10 percent to 39.6 percent, into three: 10, 20, and 25 percent. That would cut the top tax rate 14.6 percentage points, or more than a third.
Trump would cut the top corporate income tax rate by more than half from 35 percent to 15 percent (one of many differences between his business tax plan and the one proposed by House Republicans). Notably, Trump would also cut the top rate for “pass-through” business income to 15 percent. Currently, owners of pass-through firms, such as partnerships, pay individual income taxes at rates of up to 39.6 percent. Lowering this rate would likely encourage many taxpayers to avoid tax by reclassifying themselves as “independent contractors.”
Trump would repeal the alternative minimum tax, the estate tax, and the Affordable Care Act’s 3.8 percent investment tax (so long-term dividends and capital gains would face a top rate of 20 percent). He’d preserve deductions for mortgage interest and charitable giving but cap the value of most other individual tax deductions. He’d leave payroll taxes unchanged.
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Donald Trump’s choice for vice president, Indiana Governor Mike Pence, has only run the state since 2013, but he’s already built a reputation as a premier tax cutter. In just three years as governor, Pence successfully pushed proposals to cut income taxes, corporate taxes, personal property taxes, and completely eliminate the state’s inheritance tax.
When Pence took office, Indiana’s 3.4 percent flat individual income tax rate was already the second-lowest in the nation (only Pennsylvania’s 3.07 percent was lower). Still, in his first state of the state address, Pence pitched a 10 percent cut as an “affordable” way to “unleash half a billion dollars” into Indiana’s economy. The legislature eventually passed a 5-percent reduction, bringing Indiana’s tax rate down to 3.23 percent over the next two years.
The same legislation also immediately killed Indiana’s inheritance tax and repealed its dormant estate tax. The inheritance tax, which affected estate transfers greater than $250,000, was already scheduled to phase out by 2022, but Pence and the legislature repealed the tax for the estates of all persons deceased after Dec. 31, 2012.
Pence proposed more tax cuts in 2014. That year, he signed legislation that will gradually lower Indiana’s corporate income tax rate from 6.5 percent in 2015 to 4.9 percent in 2021. The legislation also allows Indiana counties to trim personal property taxes for businesses—although Pence wanted to repeal the tax. He championed both proposals as ways to make Indiana more competitive with neighboring states, though the relationships between tax structure or even tax reductions and state economic growth is mixed.
Pence did not secure further tax cuts in 2015, but he signed a law that changes the rules for taxing the sale of certain manufacturing equipment. This simplification brought Indiana more in line with how other states treat these business-to-business sales. Pence proposed completely exempting such sales from tax, but the legislature passed the more modest change because of revenue concerns.
Finally, the Trump campaign is sure to tout Indiana’s economic record during Pence’s tenure. Indeed, since Pence took office in January 2013, Indiana’s unemployment rate has fallen from 8.4 percent to 5 percent. But a state’s economy depends on a lot more than what the governor does, especially in three short years. Besides, Indiana’s unemployment rate has roughly tracked the national average for decades, and did the same during Pence’s term, when the national rate fell from 8.3 percent to 4.7 percent.
That’s why it’s always better to examine what a governor can control: policy decisions. And Pence will win kudos from conservatives as a successful tax-cutter who kept his budget balanced with offsetting spending reductions.
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I’ve never seen anything quite like it: A presumptive presidential candidate proposes a major policy initiative and a month before he is due to be formally anointed at his convention, his own party’s House members roll out a dramatically different plan.
That, of course, is exactly what House Speaker Paul Ryan and his caucus just did to Donald Trump and his tax reform proposal. While there are some similarities between the two blueprints—both would cut taxes primarily for business and high-income households—there are also major differences. The contrasts are so strong that it is hard to imagine how candidates sharing the same ticket can square them.
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Donald Trump’s tax and spending plan could nearly triple interest rates and increase the federal government’s debt by $14 trillion by 2026, according to an estimate by Mark Zandi and his colleagues at Moody’s Analytics. In 2018, the federal government could be paying more than $900 billion in interest—nearly twice what it pays today. By 2026, it could be paying more than $1.8 trillion in debt service, 50 percent more than under current fiscal policy.
Zandi primarily looked at the effects of Trump’s plan on the overall economy. And it would be bad: his economic policy would throw the country into a recession by early 2018 and dampen growth over the next decade. But let’s just focus on what it could mean for interest rates and the federal debt.
The heart of Trump’s plan is his rewrite of the federal tax code. In December, the Tax Policy Center estimated his proposal would reduce federal revenues by $9.5 trillion over 10 years, and by nearly $1.2 trillion in 2026 alone. TPC assumed that, if not offset by spending cuts, Trump’s plan would add $1.7 trillion in interest costs over the decade—$385 billion in 2026—assuming no change in interest rates. So far, Trump has not specified spending reductions beyond his promises to cut “waste, fraud, and abuse” eliminate a few modest federal programs, and cap the federal share of Medicaid.
Zandi and his colleagues looked at Trump's tax and spending plans, as well as his proposed immigration and trade policies. They assumed Congress would reduce planned spending by about $1.5 trillion over 10 years. Still, the Trump plan would result in a big bump in borrowing. And Zandi found those higher deficits would drive up rates significantly.