Tax Proposals in the 2016 Democratic Platform, Explained (Part 1)
July 5, 2016
Last Friday, the Democratic National Platform Committee released a draft version of the 2016 Democratic Party platform.
While party platforms are usually inconsequential documents, a great deal of attention has been paid to this year’s Democratic Party platform, which was crafted jointly by representatives of Hillary Clinton and Bernie Sanders. Many observers believe that the platform will signal the future policy direction of the Democratic Party, following a contentious presidential campaign that divided the Democratic base on several issues.
One issue on which Clinton and Sanders had major disagreements was tax policy. As my colleague Alan Cole pointed out a few months ago, the tax plans issued by the Clinton and Sanders campaigns were so radically different that it’s almost difficult to believe that the two belong to the same party. To take one example, the Sanders tax plan would increase taxes by more than 15 times as much as the Clinton plan would.
As a result, it is fascinating to read through the tax policy proposals in this year’s Democratic platform and examine the extent to which Clinton’s or Sanders’ ideas won the day. On some issues, such as tax relief for the middle class and financial transactions taxes, the platform reflects Clinton’s priorities. On others, such as payroll taxes and the treatment of overseas profits, the document clearly mirrors Sanders’ proposals.
Over the next few days, we’ll be going through 12 tax policy proposals that are mentioned in the 2016 Democratic platform, in order of appearance. Alongside each proposal are a few lines of commentary about how each proposal might work, as well as its relationship to the Sanders and Clinton tax plans.
Here are the first six tax policy proposals listed in the Democratic platform:
1. “We will make sure Social Security’s guaranteed benefits continue for generations to come by asking those at the top to pay more, and will achieve this goal by taxing some of the income of people above $250,000.”
Currently, the Social Security payroll tax only applies to each individual’s first $118,500 in wages and self-employment income. As a result, middle- and low-income Americans pay a higher share of their income in payroll taxes than high-income Americans. Many tax policy analysts have suggested broadening the payroll tax base by raising the cap above $118,500 or otherwise reducing the amount of wages that are not subject to the Social Security payroll tax.
The proposal referenced in the Democratic platform – taxing “some of the income of people above $250,000” – appears to be a toned-down version of one of Sanders’ proposals: to apply the Social Security payroll tax to all payroll above $250,000. A recent Tax Foundation publication found that this proposal would raise $720 billion in federal revenue over 10 years, with a relatively small amount of economic harm.
2. “We support a financial transactions tax on Wall Street to curb excessive speculation and high-frequency trading, which has threatened financial markets. We acknowledge that there is room within our party for a diversity of views on a broader financial transactions tax.”
Over the past few years, as dissatisfaction with the American financial industry has grown, the idea of a financial transactions tax (FTT) has grown popular in left-wing policy circles. A FTT would levy a tax on individuals every time they trade a stock, bond, or other financial instrument. Opponents of FTTs note that they are likely to discourage trading, reduce liquidity, and tax the same economic activity several times.
The issue of a financial transactions tax was a point of major disagreement between Clinton and Sanders during this year’s campaign. Clinton favored a miniscule tax, specifically targeted at high-frequency trades, to discourage market volatility and unfair practices. Sanders called for a broad tax on nearly all financial transactions, with a top rate of 0.5%. While Sanders claimed that his FTT proposal would raise $300 billion a year, more credible estimates have placed the revenue from his proposal at $50 billion.
Here, the Democratic platform appears to take Clinton’s position, by calling for a FTT specifically designed to “curb excessive speculation and high-frequency trading.” However, the platform throws a bone to Sanders supporters by acknowledging that some Democrats desire a “broader” financial transactions tax.
3. “Democrats will claw back tax breaks for companies that ship jobs overseas…”
This line in the Democratic platform probably refers to a novel proposal that the Clinton campaign floated in March: denying certain corporate tax deductions and credits to companies that move their operations overseas.
It is unclear exactly how this proposal would work. From news reports, it seems that Clinton would deny the R&D credit, the domestic production deduction, and other tax incentives to companies that reduce their U.S. employment. Importantly, Clinton’s proposal would “claw back” tax benefits that businesses have already received, going back several years, making this proposal retroactive.
4. “…eliminate tax breaks for big oil and gas companies…”
The federal tax code contains several provisions that treat oil, gas, and coal companies differently than other businesses. Most of these provisions allow fossil fuel companies to deduct more of their expenses up front, leading to lower taxes. The Congressional Research Service estimates that, in 2013, the federal government lost $4.8 billion due to tax preferences for fossil fuel companies (compared to $13.4 billion in tax preferences for renewable energy).
Both Clinton and Sanders would eliminate all tax preferences for fossil fuel companies. In addition, both candidates would also limit the ability of certain fossil fuel companies to claim foreign tax credits for their business activity overseas. The Democratic platform reflects the consensus of the two candidates on this issue.
5. “…and crack down on inversions and other methods companies use to dodge their tax responsibilities.”
The U.S. tax code levies a higher tax burden on companies headquartered in America than on companies headquartered in other countries. It is relatively easy for a U.S. company to change the location of its headquarters, by having a foreign company purchase its shares or assets. This process is known as an inversion, and more than 20 U.S. companies since 2012 have used this maneuver to move their headquarters abroad and lower their U.S. taxes.
Since inversions became more popular a few years ago, many Democratic lawmakers have decried the trend (Clinton has gone so far as to call the practice a “perversion") and offered targeted measures to penalize companies that invert. Republicans tend to treat inversions as a symptom of larger problems with the corporate tax system, and argue instead for broader reforms.
Clinton and Sanders have both proposed numerous measures that would target companies that engage in inversions. The Clinton tax plan would categorize any companies with more than 50 percent U.S. ownership as domestic businesses, and would require companies leaving the U.S. to pay an “exit tax” on their tax-deferred profits. Sanders’ plan would redefine “domestic business” to include foreign companies that acquire U.S. businesses. The Democratic platform does not choose between one approach or the other.
6. “We will end deferrals so that American corporations pay U.S. taxes immediately on foreign profits and can no longer escape paying their fair share of United States taxes by stashing profits abroad.”
Since the introduction of the corporate income tax in 1913, U.S. corporations have not been required to pay U.S. taxes on profits earned by their foreign affiliates until the profits are brought back to the United States parent. This provision is known as deferral, and it partially mitigates the double taxation that the U.S. tax system imposes on profits earned abroad.
Sanders has long advocated for repealing the deferral of foreign-source income, as a way of increasing taxes paid by U.S. corporations. This would be a radical and unprecedented change to the U.S. tax system. It would likely raise more than $850 billion in additional taxes on businesses over a decade. Ironically, it would also encourage more corporations to engage in inversions, because ending deferral would raise taxes only on corporations headquartered in the U.S.
Amazingly, the Democratic platform committee has incorporated Sanders’ call to end deferral into the draft 2016 platform. This is a major victory for Sanders’ ideas and policies. As things stand right now, most congressional Democrats and President Obama would be unlikely to support this proposal in the Democratic platform.