Four Curious Claims About Taxes in the First Presidential Debate

September 27, 2016

Taxes played a central role in last night’s presidential debate, as Hillary Clinton and Donald Trump presented contrasting visions for U.S. economic policy. The candidates mentioned taxes more than 40 times throughout the debate, promoting their respective tax plans and criticizing each other’s proposals. However, several of the claims that Clinton and Trump made about tax policy were incorrect or misleading:

The Great Recession was caused by tax policy

Throughout the debate, Clinton continually criticized Trump for his plan to cut taxes for the wealthy, arguing that lower taxes on the rich would not help the U.S. economy. But at one point, Clinton went even further, claiming that tax cuts for the wealthy helped lead to the recession of 2008:

CLINTON: Well, let’s stop for a second and remember where we were eight years ago. We had the worst financial crisis, the Great Recession, the worst since the 1930s. That was in large part because of tax policies that slashed taxes on the wealthy, failed to invest in the middle class, took their eyes off of Wall Street, and created a perfect storm.

There is little evidence that federal tax policy had much to do with the Great Recession. Most economists agree that the economic downturn was caused by increased systemic financial risk coupled with a housing bubble. While there are some theories that trace these conditions back to U.S. tax policy – for instance, that the exclusion of capital gains on home sales, passed by President Bill Clinton in 1997, encouraged the housing bubble – these connections are tenuous.

Mexico uses its value-added tax to harm U.S. exports

Trump’s first comment about tax policy in last night’s debate focused on the international competitiveness of the United States. Specifically, Trump pointed to Mexico’s value-added tax as an example of how U.S. businesses are being hurt by other countries’ policies:

TRUMP: Let me give you the example of Mexico. They have a VAT tax. We’re on a different system. When we sell into Mexico, there’s a tax. When they sell in — automatic, 16 percent, approximately. When they sell into us, there’s no tax. It’s a defective agreement. It’s been defective for a long time, many years, but the politicians haven’t done anything about it.

Trump is correct that Mexico’s value-added tax is border-adjustable – it taxes imports and exempts exports – but is incorrect that this puts U.S. companies at a competitive disadvantage. Making a tax border-adjustable just means that the tax applies to consumption within a country’s borders and not to goods and services that are consumed abroad. Most economists believe that border-adjusted taxes have no long-run effect on overall levels of exports and imports, because each country’s currency can adjust accordingly. As my colleague Kyle Pomerleau wrote a few months ago, “A border adjustment is not a tariff, nor would it give [a country] a trade advantage.”

Getting rid of “carried interest” is a large tax increase on the wealthy

At one point in the debate, Trump was asked by the moderator to defend his proposed “tax cuts for the wealthy.” Trump responded by pointing to one proposal of his which would increase taxes on the wealthy:

TRUMP: I’m getting rid of the carried interest provision. And if you really look, it’s not a tax — it’s really not a great thing for the wealthy. It’s a great thing for the middle class. It’s a great thing for companies to expand.

“Carried interest” refers to certain private equity management fees that are currently taxed as capital gains, rather than at higher ordinary income rates. Trump has indeed proposed taxing carried interest as ordinary income, which would raise taxes on some high-income Americans. However, this proposal would only raise taxes on the wealthy by a very small amount, while the Trump tax plan as a whole would cut taxes significantly for high-income individuals. It was probably misleading for Trump to defend his tax plan by pointing to a single, relatively minor provision in it.

The U.S. tax system rewards financial transactions

When describing her vision for the federal tax system, Clinton implied that the federal tax code currently rewards financial transactions:

CLINTON: “We also, though, need to have a tax system that rewards work and not just financial transactions.”

There is no meaningful sense in which the current U.S. tax system rewards financial transactions. In fact, in many ways, the U.S. tax system discourages financial transactions from occurring. Short-term capital gains are taxed at higher rates than long-term investments, making it less profitable for individuals to engage in short-term transactions. More generally, capital gains are not taxed until investments are realized, creating a lock-in effect, where individuals hold on to their assets for as long as possible, rather than selling them.

It was nice to see the candidates talking so much about tax policy last night, and hopefully they’ll do a better job of getting the facts right during the next two debates.



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