As with everything else surrounding the 2016 presidential election, there is a lot of uncertainty and hype when it comes to the potential impact on the U.S. tax regime. Of course, when it comes to tax reform, the devil is always in the details. The following summarizes the key components of the
tax plans proposed by presidential candidates Hillary Clinton and Donald Trump.
BUSINESS TAXES
On the business tax front, Mr. Trump's proposal lowers the corporate tax rate to 15% (from a maximum 35%), while Ms. Clinton has not announced any plans to change the U.S. corporate tax rate from its existing levels.
Ms. Clinton has proposed a tax on high-frequency trading (at a currently unspecified rate). Mr. Trump has proposed a one-time, 10% repatriation tax on all currently deferred overseas income that would allow U.S. entities to repatriate “trapped” foreign profits back to the country at a reduced rate.
Despite the differences in rate proposals, neither plan revamps or changes the fundamental “worldwide” characteristic of the U.S. tax regime. Thus, under both plans, a U.S. corporation (or individual) would remain subject to U.S. tax on its worldwide income, albeit at potentially lower rates than currently in the event
Mr. Trump's plan is enacted.
As a result, neither plan eliminates the necessity of multiple returns, foreign-tax-credit calculations or U.S. reporting obligations that have significantly raised costs for U.S. businesses and individuals working overseas. Although Trump's plan to allow a lowered tax rate on repatriated income helps U.S. entities with overseas income, it should be remembered these profits have already been taxed overseas, so his proposal effectively lowers the rate on a second level of tax.
Finally, neither candidate's plan appears to revise the existing foreign account reporting regime that has impacted the ability of U.S. businesses to work with foreign financial institutions.
INDIVIDUAL TAXES
On the individual side, Ms. Clinton plans to add a 4% surcharge to income over $5 million, while raising rates on medium-term capital gains (defined as investments held less than six years) to between 24.6% and 39.6% (the current rate for such gains would be 23.6%).
4%surcharge Hillary Clinton wants to add to incomes over $5 million
Mr. Trump's plan lowers the highest marginal rate from 39.6% to 33% and establishes three tax brackets at rates of 12%, 25% and 33%. His plan also eliminates the 3.6% net investment income surtax, effectively reducing the maximum long-term capital gains rate to 20%.
Both candidates have proposed taxing carried interest at ordinary income rates, as opposed to capital gains rates. Although these proposals could impact equity investment and formation activities, in Mr. Trump's case, the lower proposed ordinary income rates would lessen the effect on high-income investors.
In Ms. Clinton's version, the combination of the existing ordinary income rate and the proposed 4% surcharge would mean the carried interest change is more likely to have an impact on potential investment and formation activities.
ESTATE TAX
Mr. Trump plans to eliminate the estate tax, while Ms. Clinton's plan increases the top estate tax rate to 45% and lowers the estate tax exclusion to $3.5 million. Her plan would increase the need for significant levels of estate planning — particularly for family farms and businesses where liquidity issues might arise upon a succession event.
(Related read: Hillary Clinton-Donald Trump slugfest could permanently alter US politics: Horizon Investments' political strategist)
Mr. Trump's plan would eliminate the need for complex estate planning and instead would allow small businesses to focus on succession planning from a business and operational standpoint.
One unaddressed question relates to existing, proposed and future regulations. One would expect Ms. Clinton to follow the current trajectory of broad-reaching IRS regulations. To the extent that Mr. Trump limits additional regulations or the expansion of current regulations, his plan might again differ significantly from Ms. Clinton's. However, without any specific proposals, it is hard to determine as of yet.
Joshua A. Ehrenfeld is a tax lawyer and partner at Burr & Forman.
