In the past year, TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation has conducted detailed analysis of tax plans from a half dozen presidential candidates, and it has further analyzed the public statements of every candidate in the race in order to keep track of how the tax debate is shaping up so far.
Tomorrow night’s Republican debate on CNBC is expected to focus on economic policy, so here are a few things that an informed voter should look out for from the candidates tomorrow night.
1. Balancing the Budget
Tax cuts are popular, and they are especially popular among Republican nominees. The detailed tax proposals we have seen so far have cut taxes between $2 trillion and $12 trillion over the next decade. Even after accounting for economic growth from improved incentives to work and invest, most Republican plans would reduce revenues between $1 and $10 trillion over the next ten years. An important question for candidates, then, is how they intend to reform government spending, and whether their spending policy matches up with the tax revenue they intend to generate. This is an especially important question for three of the candidates: Governor Bobby Jindal, who has proposed a large tax cut for individuals and the elimination of the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. ; Donald Trump, who has proposed large tax rate reductions and the preservation of most entitlement programs; and Ben Carson, who does not want to raise the debt ceiling.
Tax revenues need not perfectly match spending, unless one wants—as Ben Carson does—for the debt to stop accumulating entirely. In practice, countries can operate on some deficits and hold some debt, as long as this does not become overwhelming. However, over the long run, revenues must be reasonably linked to spending; economists call this the long term budget constraint. Growth usually makes balancing the budget much easier, but if tax cuts come at too high a cost to the treasury, they must be matched with spending cuts in order to be effective.
2. Brackets Aren’t Everything. Credits and Deductions Matter Too
While brackets might be the best-known feature of tax policy—the higher your income, the higher your tax rate—the tax code actually has many other features besides the bracket structure that implement progressivity. The most important of these are the personal allowance, the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. , the earned income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , and the child tax credit. In truth, for most families, these matter much more than the bracket structure. To that end, candidates like Jeb Bush, Donald Trump, and Rand Paul will want to show that their tax plans help the middle class because of the expanded standard deductions they offer. Alternatively, candidates like Rick Santorum and Marco Rubio might focus on how their expanded personal credits would boost incomes for families.
A reduced number of brackets is also not a particularly great selling point in terms of reducing complexity. The complexity of the tax code actually has very little to do with the number of brackets, and instead has more to do with the phase-ins and phase-outs of various credits and deductions. It also often has more to do with the corporate and business tax codes than the taxes for individual workers, which are usually a bit easier.
3. Winning Internationally
It is well known that the U.S. has the highest corporate tax rate in the developed world, and the third highest in the world overall, behind only the United Arab Emirates and Chad. A perennial concern with this is that income shifting results in the underreporting of U.S. corporate income. The logical solution, then, is to lower the corporate income tax rate, as most candidates have done.
If aggressive estimates of profit-shifting are true, then a corporate rate reduction would increase reported income enough to increase overall corporate tax collections. However, under weaker assumptions, this is a relatively minor issue. A recent Tax Foundation publication breaks down the issue further.
This issue certainly takes precedence for a candidates like Donald Trump, who sees the world in the light of international competition and would like to reduce the corporate tax rate to fifteen percent.
4. Deductions on the Chopping Block
While the Republican candidates have generally proposed reducing taxes on net, they seem very content to eliminate tax deductions. One particular example is the deduction for state and local taxes, which appears to be a favorite target of presidential candidates so far.
Eliminating or paring back deductions is one of the best-known ways to increase average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. s (that is, the actual amount collected) without increasing marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s (which reduce the incentives to work or invest.)
However, many of the remaining deductions in the tax code are relatively popular, which has led some candidates to approach them more warily. The mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. , in particular, seems to be surviving so far.
5. New Revelations
This upcoming debate could be an opportunity for some candidates to propose new policy positions that they had previously not committed to.
Some candidates—like Ted Cruz, Ben Carson, and Carly Fiorina—have been relatively sparse on specifics about tax policy. There is, however, good reason to believe they have been studying the issue and plan to release more details soon. Other candidates who have already made specific policy proposals may add additional details in the CNBC debate.
How to Think About Presidential Tax Plans
These tax plans are, of course, mere hypotheticals. None of them will be passed exactly as proposed right now. However, watching the remarks candidates make about their plans can tell you a little bit about their priorities. For example, expanding the standard deduction shows that candidates are interested in reducing the tax burden of the middle class; moving to full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. of business capital costs shows that candidates are interested in new investment.
Looking at the plans together, more broadly, can give you a feel for what the party as a whole thinks of tax policy today, and what it will be likely to do in the future when a tax reform bill does come. For example, most plans contain rate reductions but axe the state and local deduction.
If this information helps you cast a better primary ballot in the months to come, then it’s worth paying attention to these plans, hypothetical though they may be.
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