Tax Proposals in the 2016 Democratic Platform, Explained (Part 2)
July 8, 2016
(Click here for Part 1)
Last week, the Democratic platform committee released a draft of the 2016 Democratic Party platform, which contains a great number of tax policy proposals. While party platforms are usually symbolic documents, there is reason to believe that this year’s platform may be an important signal of the future policy direction of the Democratic Party.
Earlier this week, we discussed six of the tax policy proposals listed in the platform. Today, we’ll go through six more, commenting on how each proposal might work and how each relates to proposals that Hillary Clinton and Bernie Sanders made during the campaign:
1. “We will… use the revenue raised from fixing the corporate tax code to reinvest in rebuilding America and ensuring economic growth that will lead to millions of good-paying jobs.”
There is an important tax policy nugget buried in this quote: the authors of the Democratic platform are calling for a set of business tax changes that raises additional revenue. This is a somewhat unusual position in the tax policy world; for instance, President Obama has repeatedly called for “revenue-neutral business tax reform” – a set of tax changes that would not raise any additional revenue.
However, throughout the Democratic primary, both Bernie Sanders and Hillary Clinton distanced themselves from the idea of revenue-neutral business tax reform. Sanders has been consistently adamant that corporations should pay higher taxes overall, while Clinton suggested at one point that her administration would raise an additional $275 billion from reforming the business tax code.
The 2016 Democratic platform adopts Sanders’ and Clinton’s approach, and commits to raising taxes on U.S. businesses. This is a major policy shift for the Democratic Party: as recently as 2012, the party platform promised “to reform the corporate tax code to lower tax rates for companies in the United States.”
2. “We will ask those at the top to contribute to our country’s future by establishing a multimillionaire surtax to ensure millionaires and billionaires pay their fair share.”
Raising taxes on high-income individuals has long been a priority for Democratic policymakers, so it is unsurprising that this year’s platform continues to call for tax increases on the wealthy.
During the campaign, Clinton and Sanders both proposed measures that would raise taxes on Americans making more than $1 million. Clinton would impose a 4 percent surtax on all income above $5 million, leading to a top tax rate of 43.6 percent. Sanders would go further, imposing a set of tax rates ranging between 43 percent and 52 percent on all income above $500,000.
Interestingly, this year’s Democratic platform does not specifically call for higher taxes on anyone besides “millionaires and billionaires.” To contrast, Clinton’s tax plan would raise taxes on households making above $250,000, and Sanders’ tax plan would raise taxes on taxpayers at every income level.
3. “In addition, we will shut down the 'private tax system' for those at the top…”
This line in the Democratic platform is a reference to a widely shared New York Times article from last December, which claimed that high-income Americans have “used their influence to steadily whittle away the government’s ability to tax them.” The article argued that high-income Americans take advantage of the complexity in the U.S. tax code and the limited enforcement capacity of the IRS.
Shortly after The Times article was published, the Clinton campaign released a policy plan that promised to “end the private tax system for the wealthiest.” The plan included changes to the treatment of foreign reinsurance, Roth IRAs, and several other tax provisions. Sanders has also consistently railed against “loopholes that benefit the wealthy,” though he does not usually use the term “private tax system.”
It is unclear exactly what shutting down the “private tax system” would entail, but based on Clinton's and Sanders’ proposals, it would probably consist of eliminating provisions that allow high-income Americans to lower their tax bills. It is possible that this platform proposal would also entail increased funding for the IRS, although neither candidate has called for this.
4. “…immediately close egregious loopholes like those enjoyed by hedge fund managers…”
The taxation of investment managers has been a matter of considerable controversy since 2007, when a law journal article introduced the term “carried interest” into the public consciousness. Carried interest refers to a compensation arrangement in which investment managers receive a share of the returns on an investment. Under the current U.S. tax code, carried interest is considered a capital gain and is taxed at a 23.8 percent rate. However, many argue that carried interest is really a form of wage income, and should be taxed at a rate of 39.6 percent.
During the Democratic primary, both Sanders and Clinton decried the current treatment of carried interest, with Clinton going so far as to promise to change the taxation of carried interest through executive action. Even some Republicans have jumped on the bandwagon for higher taxes on carried interest, including both Jeb Bush and Donald Trump.
In practice, the treatment of carried interest is a relatively insignificant feature of the tax code; taxing carried interest as ordinary income would only raise around $1.5 billion a year. However, the issue has become symbolic of a larger push for tax fairness, which is why it received special attention in the Democratic platform.
5. “…restore fair taxation on multimillion dollar estates…”
Over the past 15 years, the federal estate tax has shrunk considerably in size and scope. In 2001, the estate tax was levied at a rate of 55 percent on assets above $675,000. By 2009, the estate tax rate had fallen to 45 percent and the exclusion had risen to $3.5 million. Today, the estate tax is levied at a 40 percent rate on assets above $5.45 million.
When the Democratic platform promises to “restore” fair taxation on estates, it is probably talking about expanding the estate tax by returning to past parameters. This was the approach of both candidates in the Democratic primary. Clinton pledged to restore the estate tax to 2009 parameters, with an exclusion of $3.5 million and a rate of 45 percent. Sanders would also decrease the estate tax exclusion to $3.5 million, but would raise the top rate to 55 percent.
6. “…and ensure millionaires can no longer pay a lower rate than their secretaries.”
This line in the Democratic platform likely refers to the Buffett Rule, a tax policy proposal that has been popular in progressive circles since President Obama proposed it in his 2012 State of the Union Address. The proposal is named after Warren Buffett, who once famously claimed that his secretary paid a higher tax rate than him.
The Buffett Rule is essentially a new minimum tax of 30 percent on taxpayers with income above $1 million. It is a central feature of Clinton’s tax plan, accounting for about a third of the gross revenue in her plan. On the other hand, Sanders’ tax plan does not create any new minimum taxes on high-income individuals (and actually repeals the existing alternative minimum tax).
As far as I can tell, the Buffett Rule is the only tax policy proposal that appeared in both the 2016 and 2012 Democratic platforms. The 2012 platform read, “We are committed to reforming our tax code so that it is fairer and simpler, creating a tax code that lives up to the Buffett Rule so no millionaire pays a smaller share of his or her income in taxes than middle-class families do.” While the Democratic Party has shifted on other tax policy issues in the past four years, the Buffett Rule is a point of continuity.