Is Donald Trump an Ally to Long-Term Investors?

By Markets Fool.com

Image source: Getty Images.

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Republicans generally favor lower capital gains taxes, which is obviously good for long-term investors. However, Republican presidential candidate Donald Trump isn't proposing to change the three tax rates that the current tax law charges for long-term capital gains. There's much more to the story than that, so let's take a closer look on whether Trump would be an investor-friendly president.

Trump on capital gains taxes

At first glance, Trump isn't making too many changes that affect long-term investors. In fact, he plans to retain the current long-term capital gains tax rates of 0%, 15%, and 20%, and adapt them to his three proposed ordinary income tax brackets.

Capital Gains/ Qualified Dividend Tax Rate

Current Income Range (Singles)

Proposed Income Range (Singles)

Current Income Range (Married Filing Jointly)

Proposed Income Range (Married Filing Jointly)

0%

$0 to $37,650

$0 to $37,500

$0 to $75,300

$0 to $75,000

15%

$37,650 to $415,050

$37,500 to $112,500

$75,300 to $466,950

$75,000 to $225,000

20%

$415,050 and greater

$112,500 and greater

$466,950 and greater

$225,000 and greater

Data source: IRS.www.donaldjtrump.com https://www.donaldjtrump.com/policies/tax-plan/

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So, while Trump would lower the tax rates for ordinary income across the board, the same would not hold true for long-term capital gains and qualified dividends. In fact, the highest 20% rate would actually apply to many more taxpayers than it currently does.

There's more to the story...

There are a few important points to mention in regards to Trump's capital gains tax plan, and this is where it gets a little tricky to evaluate his plan's effect on you as an investor.

First, Trump's plan also calls for eliminating the 3.8% net investment income tax that applies to the highest earners. Therefore, for investors with modified adjusted gross income above $415,050 (single) or $466,950 (married filing jointly), the capital gains tax rate is effectively reduced from 23.8% to 20%. However, those in the MAGI ranges of $200,000 to $415,050 (single) and $250,000 to $466,950 (married filing jointly) will actually see their effective capital gains rate rise from 18.8% to 20%.

I know this discussion is about long-term investors, but it's worth pointing out that because Trump's tax plan proposes to reduce the marginal tax rates (tax brackets) for most Americans, and short-term gains are taxed as ordinary income, short-term capital gains rates would go down in a Trump presidency for the majority of investors. Just as an example, a married couple with MAGI of $175,000 currently pays a rate of 28% on short-term gains, which would drop to 25% under Trump's plan.

Also, keep in mind that these tax rates are based on taxable income, the definition of which would change under Trump's plan. Specifically, Trump wants to more than double the standard deduction and eliminate the personal exemption, and as I wrote recently, this would reduce the level of taxable income for most (but not all) people. In other words, comparing the tax bracket thresholds of Trump's plan with the current brackets are not exactly an apples-to-apples comparison.

Finally, Trump is proposing to eliminate the estate and gift taxes altogether, which could be a huge benefit to high-net-worth investors who hope to pass their investments to heirs.

Business tax benefits could be the best news for investors

Arguably, the biggest benefit of Trump's plan to long-term investors could be his business tax plan. For one thing, the ability to repatriate foreign profits at a greatly reduced rate could certainly benefit long-term investors in American companies with significant foreign operations. And a maximum corporate tax rate of 15% would translate to more after-tax profits for many companies.

If Trump's tax plan results in the economic growth he's claiming, it could certainly benefit long-term investors. Consumers would have more income, businesses would sell more products, profits would rise, and so would stocks. However, bear in mind that no president can guarantee economic growth, not even with massive tax cuts.

Comparing Trump's investor-friendliness to Hillary Clinton

In a recent article I wrote about Democratic presidential nominee Hillary Clinton's potential effect on long-term investors, my general conclusion was that Clinton isn't as much of a friend to long-term investors as she is an enemy to short-term investors and traders.

Clinton's plan includes raising capital gains taxes on the wealthiest Americans for investments held for one to six years, and leaving the rate alone for investments held for longer than six years. She does have certain exceptions, such as no capital gains tax liability for investments in small businesses, but in general, Donald Trump is the more investor-friendly candidate -- especially when it comes to high-income investors.

However, the candidates' potential impact on investors is just one piece of the puzzle that you should consider before you go into the voting booth in November. There are many other potential changes that depend on the outcome of the election, so be sure to evaluate all aspects of both candidates' visions for America.

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