We’re up, Massachusetts! This week MA voters are beginning to cast early ballots for the presidential primary. The big day, however, is Tuesday, March 3, where voters head to the polls to make their selection for a presidential candidate. But, where do these candidates stand on taxes? Are we destined for another tax reform? Should we brace ourselves for another overhaul?
First, let’s just say that they’re all in agreement a proposed tax structure will look nothing like it is today where benefits are aimed mostly at corporations and wealthy taxpayers. While the candidates’ views vary on a number of issues, raising taxes on the rich has been a common theme woven throughout the Democratic campaign trail.
So, who are America’s wealthiest? Are we thinking of the Bezos and Zuckerbergs out there or does ‘taxing the rich’ have much broader impact? Let’s break down the top 1% for perspective.
In the United States, the IRS reports that there are about 325 million people—160 million households—which means that the top one percent is comprised of 1.6 million households. The Chicago Booth Review determined that an annual household income of $386,000 (excluding capital gains) would grant access to the top income level. That doesn’t seem like much when we’re taking about the rich of the rich. It’s not until we get to the top 0.01 percent that things really start looking up. The top 0.01 percent, comprised of 16,000 families, has an average annual income of $7 million, reported Chicago Booth Review. And Forbes calculated a total of 540 billionaires in the United States in 2016 with a combined net worth of 2.399 trillion.
Most of the high-income earners receive such rank through business income, versus inheritance. On Forbes’ annual rich list, two-thirds are self-made and one-third received some sort of inheritance. With a number of the nation’s wealthiest owning large, successful businesses, the top industries generating the most income are physicians’ and dentists’ offices, professional and technical services, specialty trade contractors, and legal services, according to Chicago Booth Review. As you climb towards the top, the highest-earning industries narrow into finance (mainly hedge funds and private equity), healthcare, technology, and food and beverage.
As you’ll see below, while the candidates propose to increase the top tax bracket, many of them are more focused on the wealth tax. Take a close look at the numbers, as some candidates impose a wealth tax on many more taxpayers than others.
Here’s a snapshot of the tax talk we’re hearing from the Democratic candidates.
Former Vice-President Joe Biden is proposing an increase in taxes for top earners, from 37 percent to 39.6 percent; for corporations, from 21 percent to 28 percent (less than the 35 percent pre-tax-reform era); and foreign earnings, from at least 10.5 percent to at least 21 percent. These proposed numbers are fairly temperate compared to his fellow nominees. He’s also proposing to cap the value of itemized deductions at 28 percent, to implement a capital gains tax for earners over $1 million, and to get rid of the “stepped-up basis loophole” that essentially erases the original cost basis of an inheritance.
Former New York City Mayor Michael Bloomberg also increases taxes on high net worth individuals in the top tax bracket, reverting back to the 39.6 percent pre-tax-reform rate. In addition, income above $5 million would receive an additional 5% surtax, and Bloomberg plans to expand the number of estates subject to estate tax. On the business side, he’s also in favor of raising the top corporate tax rate to 28 percent, and he’s looking to repeal the 20 percent deduction for pass-through entities.
Former South Bend, IN Mayor Pete Buttigieg outlines a similar tax plan for wealthy individuals by raising the top tax rate back to 39.6 percent, repealing the 20 percent deduction for pass-through entities, and increasing capital gains tax. He also plans to ping pong the corporate rate right back to where it came from at 35 percent.
Hawaii Congresswoman Tulsi Gabbard voted against the partisan corporate tax bill passed in 2017. And while she doesn’t spend much time on the topic of taxes, Kiplinger reports that in her role in Congress, she has supported bills that encourage businesses that help employees pay off student loans, lower prescription costs, and more low-income housing, among others.
Minnesota Senator Amy Klobuchar outlines a tax plan that imposes at least a 30 percent tax rate on individuals earning over $1 million and increases capital gains tax for the wealthy. She also shines a light on expanding tax credits for low-and-middle-income earners and giving incentives for job creation in the United States.
Vermont’s Independent Senator Bernie Sanders provides a more progressive tax plan with a spike in taxes for the ultra-rich, where he plans to impose an eight-bracket wealth tax (the top bracket seeing an 8 percent tax for married filers earning over $10 billion) and significantly expanding the estate tax with a top tax rate of 77 percent for estates worth over $1 billion.
On the corporate side, we’re seeing a similarly progressive blueprint for businesses, where Sanders would like to see the tax rate revert back to 35 percent for both domestic and foreign companies, repeal the pass-through entity deduction, and impose a penalty for large wage gaps between the C-suite and average worker’s wages. He is—and always has been—laser focused on using tax revenue to strengthen the nation’s Social Security program to ensure all recipients have access upon retirement.
Billionaire Hedge Fund Manager Tom Steyer is also a proponent of imposing a wealth tax, with his proposal including three tiers, the highest being a 2 percent tax on over $1 billion in net worth. Steyer plans to revert the top individual tax rate back to 39.6 percent, increase capitals gains tax, and volley the corporate rate back to 35 percent where it was before tax reform. In addition, Steyer is thinking beyond the wealthy. He proposed tax benefits targeting taxpayers making under $200k and expanding the child tax credit and earned income credit benefitting low to moderate income earners.
Massachusetts Senator Elizabeth Warren set the tone early on in the race regarding the wealth tax. It has now become a standard tax topic on the Democratic campaign platform. Warren proposes a 2 percent wealth tax on taxpayers worth between $50 million and $1 billion, and a 6 percent wealth tax on ultra high net worth taxpayers worth over $1 billion. Similar to high-earning individuals, Warren calls for a 7 percent tax rate on corporations bringing in revenue over $100 million and reverting the corporate rate back to 35 percent.
All Together Now
Many Democrat candidates are also in favor of a financial transactions tax, expanding IRS enforcement, and increasing the foreign earnings tax rate(s).
Based on previous Democratic platforms, the abovementioned tax plans are much more magnified than proposals pitched in previous elections. Candidates hope that the increase in tax revenue will help support aggressive spending plans.
No matter who you vote for, just get out and vote to make your opinion known and your voice heard. I look forward to seeing you all at the polls on Tuesday!
Happy Voting!
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About Stu: With more than 30 years of experience as a tax professional, Stu Steinberg brings a broad depth of knowledge to his work with his clients. Stu founded Erock Tax to help provide tax and financial planning strategies to individuals, families and small businesses and is passionate about empowering his clients through education about their money health. Stu is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.