It’s easy to get caught up in the commotion of the 2016 presidential election. On one hand, you have real estate mogul-turnedreality television star-turned-politician Donald Trump. On the other hand, you’ve got former Sec. of State Hillary Clinton, who is facing a fury of legal allegations and historically low approval ratings.
Needless to say, there’s plenty to talk about this election season.
One issue that hasn’t garnered much attention, as it should, however, is what each of these presidential candidates has in mind regarding the taxation of Americans. While both Trump and Clinton have released samples of their tax reform plans, neither has provided detailed breakdown of how his or her plan will improve the country’s complex tax system, or how it will be implemented.
To be fair, presidential nominees rarely provide those details. It should also be noted that it’s extremely rare for a 60-second sound bite to translate into a 60-page tax law. That would require Congress to agree enough with the code variations in either Clinton’s or Trump’s proposal to bring it to the floor for a vote, and then follow through with a majority vote to pass them through as law. Even if Congress did agree with aspects of either proposal, the final law would likely look much different than what was originally touted on the campaign trail.
The danger in that however, is if a newly formed tax bill actually gets through the point of discussion it then provides an opportunity for all members of Congress to offer their own ideas as well. Some of those ideas can be good, and some can be bad for small business.
One thing small business owners should take comfort in, is despite Clinton’s and Trump’s vast differences regarding social, economic and political values, the two do share a common attitude when it comes to their proposed tax policies — to stimulate business and inspire economic growth.
However, as it usually goes in politics, Clinton and Trump support decidedly different views on how to accomplish that goal.
Though Americans likely will not see any significant changes to the tax code under the new administration, it’s still important to understand the differences between the two proposals, and prepare for whatever changes could come.
Clinton’s Proposal
On the Democratic side, Clinton’s tax policy builds its foundation on providing simplification and tax compliance relief to small businesses, not so much on actually reducing their rates. By proposing a new standard deduction for small businesses — similar to what individual tax filers can claim — Clinton’s reform plan would make it easier for business owners to track and file their taxes. These proposed changes are also designed to influence business start-up tax deductions to ease the financial burden of starting a business.
Additionally, Clinton’s policy proposes new rules that would make it harder for businesses to move overseas. One specific item is pointed at closing tax loopholes that reward companies who shift profits and jobs overseas. Instead, she would charge an “exit tax” for companies leaving the U.S., while also adding incentives and rewards to businesses that stay and invest in jobs here.
In order to pay for these incentive programs and simplification strategies, Clinton falls back on a common strategy — taxing the top 1 percent of earners. Through a series of new and increased taxes, her plan proposes increases in marginal tax rates for those with incomes over $5 million, enacting a 30 percent minimum tax (the Buffett Rule), altering the long-term capital gains tax rate schedule and limiting itemized deductions to a tax value of 28 percent.
While Clinton’s policy does not propose significant changes to the small business tax structure, some anticipate small and medium businesses may see a slight increase of their taxes. Overall, Clinton’s proposed policy is designed to improve the country’s economic health by increasing economic revenue by about $1.1 trillion over the next decade.
Trump’s Proposal
Trump’s tax policy puts even more focus on the small business marketplace, with the largest impact coming directly from a reduction in tax rates. If Trump takes the White House in November (and Congress approves his plan) his tax proposal would reduce the business tax rate from 35 percent to 15 percent, while also eliminating most tax subsidies and setting the pass-through income at 15 percent.
On paper, Trump’s plan seems to favor all American businesses, but in reality, the 15 percent tax will only benefit a small sector of them. C-corporations — the largest business entities in the country — are some of the only companies that are actually impacted by the current 35 percent and will benefit greatly from the reduction.
The remaining businesses, known as “pass-through” entities, include S-corporations, partnerships, limited-liability companies and sole proprietorships. The name “pass-through” comes from how these companies are taxed. Rather than paying standard corporate tax rates, profits of these companies “pass through” and fall into normal income tax brackets, some as low as 10 percent. For those companies, some of which are the smallest in the country, a 15 percent tax will actually be an increase.
Trump’s plan would also impose a one-time transition tax of up to 10 percent on existing foreign income of U.S. companies, with future profits of foreign subsidiaries of U.S. companies being taxed each year as profits are earned.
When broken down, Trump’s tax plan — unless accompanied by huge spending cuts — could increase the national debt by nearly 80 percent by 2036, essentially offsetting some or all of the incentives he is proposing.
The Problem with Promises
While Trump’s tax policy targets more business-related issues and generally would put more money into the pockets of taxpayers through lower rates, and Clinton’s promises to ease the tax burdens of middle-class Americans, both candidates’ grandiose tax reform plans flounder in practicality.
What American taxpayers and especially small business owners are yearning for is simplicity.
In nearly every presidential election of the modern era, candidates have touted the idea of simplifying the staggering complexities of the tax code. In reality, most proposed policies that come with promises of simplicity really only add unnecessary layers to an already complicated system.
The urgency for a simplified tax code is especially significant for America’s small business owners, those who fall into the pass-through category. These types of companies make up nearly 90 percent of the small business marketplace and represent a significant portion of the American economy.
But, business owners of all sizes long for the day when America’s tax code is finally simplified. As it stands now, Trump and Clinton, like many of their predecessors, miss the mark.
