The 2016 presidential campaign race has seen plenty of unexpected surprises, but Americans are still firmly focused on the issues that matter to them. Taxes are one of the most important issues to many voters, and in Sunday's debate, both candidates offered some of their views about how they would change the tax system to make it fairer for all. In particular, Republican presidential candidate Donald Trump offered a few key points that he believes answer the question of how he would ensure that the wealthiest Americans will pay their fair share in taxes.
Image source: Trump campaign.
1. Eliminate the carried interest provision.
Interestingly, the first thing Trump said in answering the question of tax fairness was that he intends to eliminate the carried interest provision. Carried interest is common in the private equity and hedge fund world, where general partners of private investment funds share in the profits generated by the fund's investments. Under current tax law, the share of profits that those general partners receive is treated as long-term capital gain and taxed at the lower tax rates that apply to all long-term capital gains. When the general partner distributes those profits to its individual money managers, those managers are the ones who include them on their tax returns as capital gain.
Trump would treat carried interest as ordinary income, which even under his proposed individual tax rates would lead to a big increase in tax rates. That argument matches up with those who believe that partners in investment funds are like investment bankers, who get paid largely in bonuses that are subject to ordinary income tax. Opponents of the measure argue that investment-fund partners are enough like business entrepreneurs to justify the capital gains treatment, because unlike with salaries and bonuses, the profit is at risk until it's finally earned.
2. Cut the corporate tax rate.
The corporate tax has been a contentious issue for years, because the rate in the U.S. is higher than in many other countries. Worldwide, nations have figured out that lower tax rates can help persuade businesses to move their operations, and as more countries have fought back to keep their businesses from moving, the U.S. has stood out more and more as an increasingly rare high-tax jurisdiction.
Trump would make U.S. corporate taxes more competitive, with a 15% rate that would put the U.S. corporate tax structure as one of the lowest among developed nations. According to figures from KPMG, it would be less than the U.K.'s 20%, Japan's 32%, Germany's 30%, and China's 25% rates, and it would even make the U.S. more competitive with low-tax jurisdictions like Ireland at 12.5%. Given how popular Ireland has been as a destination for tax inversion strategies, many find some form of corporate tax reduction in the U.S. compelling as a way to keep businesses from going abroad.
3. Cut taxes for the middle class.
Trump would streamline the tax code to create a far smaller number of tax brackets, eliminating the alternative minimum tax and the surtaxes on investment income that currently apply to high-income taxpayers. After a simplified standard deduction of $15,000 for singles and $30,000 for joint filers, Trump's plan would have three tax brackets as shown below.
Data source: Trump tax reform plan.
In addition to these brackets, Trump would implement new maximums for itemized deductions, in an effort to address tax fairness. Limits of $100,000 for single filers or $200,000 for joint filers would have no impact on most taxpayers but would target higher-income earners who currently can claim theoretically unlimited amounts of itemized deductions.
Overall, Trump has taken the position that cutting tax rates will boost economic growth and lead to greater prosperity for the American people more broadly. Whether you agree or disagree, he has made that idea the centerpiece of his tax strategy, and taxpayers can expect measures to follow that general ideology if Trump wins the election in November.
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