Image source: Flickr user Nathaniel F.
With the Democratic and Republican conventions now officially in the rearview mirror, we're about to see Republican presidential candidate Donald Trump and Democratic presidential candidate Hillary Clinton square off in one of the oddest elections of all time. Regardless of who wins, history will be made.
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This is also the time of the year when we get to peer under the hood of each candidates' economic proposals. Even if you don't find yourself gravitating toward either candidate, you should understand how their policies could affect your finances. And while both candidates offer policies that could prove beneficial to America as a whole, some of their economic proposals could be downright disastrous.
How disastrous? Let's take a brief look at a few of Clinton's and Trump's proposals.
Hillary Clinton's most dangerous economic proposals
If there are two groups in particular that may be harmed by Clinton's economic proposals, then they are investors and seniors.
Capital gains tax reform
For all intents and purposes, Clinton's tax proposal doesn't deviate much from the current tax brackets we have under President Barack Obama. One of the few exceptions is that Clinton proposes adding a 4% surtax on earnings exceeding $5 million. However, there is one major deviation when it comes to Clinton's capital gains tax reform proposal.
Under the current capital gains tax structure, assets (including stocks) that are held for 365 days or less are taxed at your ordinary income tax rate. This could be anywhere from 10% to 39.6%. Conversely, long-term capital gains on assets held for 366 days or longer are taxed at the following rates:
- 0% for those in the 10% and 15% marginal tax brackets
- 15% for those in the 25%, 28%, 33%, and 35% marginal tax brackets
- 20% for the top marginal tax bracket of 39.6%
Under Clinton's plan, we'd see much more progressive capital gains taxes. The table below shows the capital gains tax rates that investors in the top income-tax bracket would pay based on how long they held their assets before selling them.
Table by author. Data source: Tax Foundation. "Marginal Tax Rate" = capital gains tax rate before Net Investment Income Tax and surtax on incomes exceeding $5 million.
Under Clinton's capital gains tax reform proposal, investors would have to hold their assets for six or more years to realize tax treatment similar to what they're getting today. While it encourages the buy-and-hold ethos that we love at The Motley Fool, this new capital gains tax rule could stagnate investment from wealthier individuals who simply don't want to hold their investments for six years. A lack of new investment could sap job creation and lead to economic stagnation.
Expanding Social Security
The other concern would be for current retirees who are receiving a Social Security benefit each month. Nearly 60% of seniors rely heavily on Social Security, but the mass retirement of baby boomers and Americans' longer life expectancies have made the program unsustainable. By 2034, per the latest Social Security Board of Trustees report, a benefits cut of up to 21% may be needed to sustain Social Security through the year 2090.
Image source: Getty Images.
Hillary Clinton has championed the idea of not only making Social Security sustainable, but also expanding benefits for seniors. One of her main solutions involves raising the payroll earnings tax cap on Social Security so that higher-income earners pay more into the system. Right now, any income earned over $118,500 is free from payroll taxation, while income below this mark is taxed at 12.4% (you and your employer typically split this tax down the middle). Clinton would like to see additional revenue generated for Social Security by taxing income over $200,000.
But here's the problem: Taxing the rich only eliminates about 30% of Social Security's budget shortfall, per the Centers for Retirement Research (CRR) at Boston College. Nowhere do Clinton's proposals suggest where the remaining 70% would come from. Worse yet, the projections from the CRR are only based on maintaining benefits at their current levels, not expanding them. If Clinton were to actually expand benefits, she could drain the program's spare cash even faster, resulting in the need for faster or steeper benefit cuts.
Image source: Flickr user Evan Guest.
Donald Trump's most dangerous economic proposals
Republican candidate Donald Trump has some suggestions that could make working-class Americans and baby boomers cringe.
One of the key components of Trump's economic strategy is to simplify the current tax system and lower taxes for Americans across the board. Here's what the progressive income tax brackets look like today:
Table by author. Data source: IRS 2016 income tax brackets.
And here's what they'd look like if Trump had his way:
Table by author. Data source: Donald Trump; Tax Foundation.
As you can see, Trump wants to dramatically reduce taxes on the consumer, and he also wants to slash corporate income tax rates from 35% to just 15%. Trump firmly believes that making the U.S. corporate income tax rates more competitive with those of other developed countries will encourage U.S. companies to hire domestically and repatriate their foreign earnings. Trumps says this could also encourage overseas companies to make investments in the United States.
There's just one problem with Trump's proposal to put more money in the pockets of Americans and corporations: our growing national debt. According to the Tax Foundation, Trump's economic proposals would result in a $12 trillion static reduction in tax revenue over the next decade.This implies that the national debt could swell far beyond the $19.4 trillion figure we're quickly approaching. Rising national debt could be terrible news for the working class, as it could lead to above-average levels of inflation, higher interest rates, slowing economic growth, and lower hiring rates.
Leave Social Security alone
Perhaps the biggest irony of all is that Donald Trump's Social Security plan could prove dangerous to baby boomers. I say "ironic" because Trump's Social Security plan isn't really a plan at all. Trump has, on numerous occasions, proposed leaving Social Security untouched.
On one hand, allowing the program to continue as is provides some degree of certainty for current retirees who would prefer that the government leave the program alone.
Image source: Getty Images.
But there's a downside to simply kicking the can down the road for the next president or generation to deal with. Doing nothing would guarantee the unsustainability of the program and lead to benefit cuts by 2034, per the Board of Trustees' estimates. Baby boomers who are retiring over the next 15 years, some of whom will be quite reliant on Social Security, could see a steep drop in benefits if lawmakers take Trump's "sweep it under the rug" approach. Something clearly needs to be done to fix Social Security, and Trump's stay-the-course suggestion isn't it.
These two presidential candidates will surely refine their economic policies in the coming weeks as we ready for the presidential debates. What you should be doing is paying close attention to both candidates' stances, as their election to the Oval Office could have a direct impact on your pocketbook.
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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.
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