Clinton vs. Trump Tax Plan: Objective Analysis
|The Lange Money Hour: Where Smart Money Talks
|Click to hear MP3 of this show|
- Introduction of Roberton “Bob” Williams of the Tax Policy Center
- No Ax to Grind: Tax Policy Center Provides Unbiased Information to Inform the Discussion
- The Clinton Plan: Big Hikes on the Wealthy Would Raise $1 Trillion Over a Decade
- Would the Wealthy Change Their Behavior to Avoid Paying Higher Tax Rates?
- The Trump Plan: More Americans Would Pay No Income Tax; Deep Cuts for Wealthy
- Trump Plan Would Slash Corporate Taxes, Add $9.5 Trillion to Deficit Over a Decade
- More Clarity on Tax Plans Is Needed, Expected From Both Candidates
- Trump Has Not Outlined Spending Cuts to Offset Severe Revenue Losses
- With Huge Tax Cuts and No Spending Cuts, Government Would Have to Borrow More
- Would Clinton’s Increases Curb Economic Growth? It Depends on Economic Opportunity
- The Role of Congress: No President Can Unilaterally Dictate Tax Policy
- We’re All in Agreement: Complicated U.S. Tax System Needs Reform
- Where to Go to Learn More About How Taxes Affect You
- Taxes Are Just a Small Factor in the Decision to Get Married
- U.S. Is a ‘Relatively Low-Taxed Country Compared to Others’
- Retirement of Baby Boomers Is Likely to Put Upward Pressure on Tax Rates
- Alternative Ways to Raise Revenue: Federal Sales Tax and Value-Added Tax
Sign Up Today and Get your FREE Bonus!
Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.
Dan Weinberg: And welcome to The Lange Money Hour. I’m Dan Weinberg along with CPA and attorney Jim Lange. With the presidential election less than three months away, Americans are preparing to choose between two very different candidates. Over the next hour, we’re going to look at what might be in store for Americans in terms of Hillary Clinton and Donald Trump’s economic policies, and to help us do that, we are welcoming Roberton Williams to the program. Bob is the Sol Price Fellow at the Urban-Brookings Tax Policy Center at the Urban Institute, where he focuses on communicating the Tax Policy Center’s broad range of work through papers, blog posts on TaxVox, extensive interaction with the media, and a broad range of features on the website. Twice given the Urban Institute President’s Award for Communication, Bob Williams has spearheaded the Tax Policy Briefing Book, overseen development of interactive tax returns and four Tax Policy Center tax calculators, and has also written the popular whiteboard video “Debunking Myths About Who Pays No Federal Income Tax.” Before joining Urban, Bob worked in the Congressional Budget Office from 1984 through 2006. So, let’s get right to it. Let’s get started on what should be a fascinating hour by saying good evening to Jim Lange and Roberton Williams.
Jim Lange: Welcome, Bob!
Roberton Williams: Thank you.
Jim Lange: So good to have you. So, one of the things that our listeners might be thinking, and this is listeners on both sides of the fence, although I think there’s, at least with the local audience, probably more on the right side than the left side, and our national audience probably a little bit more on the left side. But anyway, on both sides of the fence, they’re going to say, “Oh, OK, here’s this guy who’s going to talk about tax policy, but he certainly has his own point of view, and he’s going to try to influence us one way or the other by trying to, let’s say, bring out the most popular tax provisions of the candidate he prefers, or he was going to try to color it in a way that’s going to make his candidate seem more favorable.” How would you respond to that objection? Because I really want to try to let the listener understand what you and your organization are doing. So, could you answer that question, please?
Roberton Williams: Well, I certainly have my own personal views about the candidates, and I’ll express those in a ballot box in November, but professionally, my role is to inform the discussion of tax policy in general. The Tax Policy Center was established in 2002 to provide unbiased information about tax policy, to provide information about what tax proposals would do, who would be affected, how they would be affected and what the economic implications might be. The people who started the Tax Policy Center included members of the George H.W. Bush administration, the Clinton administration and the George W. Bush administration. So, we have people from both sides of the political aisle, but we all park our personal views at the door and try to focus on the economics of each tax-policy proposal.
Jim Lange: All right, well, why don’t we start with the Democrats? I know Hillary (Clinton) is about to make a big speech, but I don’t think that what she is doing is any big secret. What do you think are some of the big differences between what Hillary proposes and, let’s call it, the status quo?
Roberton Williams: The two major changes that Hillary would make to the current tax situation at the federal level: One is she would raise taxes substantially on wealthy taxpayers. She would impose a Buffett rule, which says people with very high incomes should pay at least 30 percent of their income in tax. The particular proposal she is interested in is one proposed by Senator Whitehead of Rhode Island that said by the time you’re making $2 million, you should be paying at least 30 percent of your income in taxes. There’s a phase in between a million and $2 million of income, but very high-income people will be paying more tax. She also proposes a surtax on people with incomes over $5 million. Four percent of income over $5 million will be added to your tax bill every year. So, it’s two big increases, potentially large increases, on high-income taxpayers. The second piece is something that she’s taken from President Obama’s proposals, something the president has proposed in each of his last four budgets, that would limit the value of tax deductions and exclusions and exemptions to no more than 28 percent. Now, this requires a little bit of explanation. The value of a deduction is a function of the tax rates you pay. If a deduction reduces your taxable income, if you’re in the 35-percent tax bracket, you save 35 percent of the deduction. If you’re in the 10-percent tax bracket, you save 10 percent. She’s saying we’ll limit the savings to 28 percent. So, if your tax rate is higher than 28 percent, and the 35-percent tax bracket to the 39.6-percent tax bracket, you would lose some of the value of those deductions. All three of those things, the Buffett rule, the surtax over $5 million and the limitation on the value of deductions and exemptions would hit only high-income people, only people that are in the top tax brackets and have very high incomes. So, her tax increases are targeted totally on the wealthy. We estimate they would raise about $1.1 trillion of additional revenue over the next decade. That’s a couple of percentage points of total revenue projected by the Congressional budget office for that period.
Jim Lange: Well, that actually brings up a couple questions. The first, just so our listeners understand about the 28 percent, because I don’t know how many of them are going to be in the five million dollar or would be subject to the Warren Buffett rule. But I think a lot of them might be above 28 percent. So, let’s say, for discussion’s sake, that I’m in the 35-percent bracket, and I have a house and I have an interest deduction on the house, and let’s just say, for discussion’s sake, that that interest deduction is $10,000. So, normally, that would be worth $3,500 to me because I’m in the 35-percent bracket and I’m going to get a deduction that’s going to be worth, in effect, $3,500. Is what you’re telling me that the rule that Hillary is proposing is I’ll still be able to deduct my interest, but it’ll only be at $2,800, not $3,500?
Roberton Williams: Yeah, you’re absolutely right. Basically, instead of saving 35 percent of the $10,000, reducing your taxes by $3,500, you’d save just 28 percent or a $2,800 reduction on your taxes. Essentially, your tax bill would go up by the $700 difference.
Jim Lange: OK. All right, now, the next question that I immediately thought of, and this might, let’s say, challenge some of your objectivity a little bit. So, let’s assume that you guys have said, “OK , here’s the tax rates right now. We know how many people would be subject to tax if Hillary’s proposal did pass, and therefore, it would bring in an extra, let’s say, trillion dollars,” or whatever the number is. Does that have any behavioral modifications in there? In other words, would people do something to avoid it? Does that necessarily assume that the economy won’t go down because people don’t have as much money to spend, et cetera, et cetera? I guess what I’m asking is what are some of the internal assumptions on the $1 trillion coming in for, in effect, hitting wealthier taxpayers, and even the 28-percent rule?
Roberton Williams: Changes in tax rules have two effects on behavior and the economy. One is individual behavior. If I raise the tax on capital gains, for example, people will realize fewer gains. So, that kind of behavioral change, people changing how they collect their income, we build into our model. The other change, what the effect on the economy as a whole, is something we have not yet built in our model ? it’s something we’re working on and hope to have finished before the election ? is the macro effect, the macroeconomic effect, on the entire economy. So, if we lower taxes, does that increase the amount of investment by individuals, which boosts the number of jobs and the productivity of the economy and boosts GNP, and therefore boosts revenues? In essence, do tax cuts raise the overall size of the economy? And that, as I say, that’s not something that’s in our models yet. We did address the issue in our discussion of both the Clinton and Trump proposals, but more from a general perspective rather than trying to calculate exactly what would happen. I can explain in detail what we did there, but in essence, we did not put it through a formal growth model that will project how the economy as a whole would change. They say, “We’re working on them now. We expect to have a macro model built into our micro-simulation model over the next couple months.”
Jim Lange: All right. I would like to go back to this point because it might be more relevant for Donald Trump’s proposals. But maybe if we could switch over to him because in the primary, he was talking about some very, very low tax brackets, and at the Detroit, I guess, Economy Club, he was talking about something that was a little bit more in line with what Paul Ryan had said. Could you explain the essence of … and by the way, I know you haven’t had a lot of time to interpret this, but could you, let’s say, explain the essence of what Trump’s proposal is, and then we can comment on the advantages and disadvantages of it?
Roberton Williams: I’ll discuss an amalgam of what Trump proposed last fall and what he’s proposed more recently in his Detroit economic speech. The biggest features of his plan last fall were reductions in overall tax rates, sharp reductions, and a very large increase in the standard deduction. The standard deduction currently is about $6,000 for individuals, twice that for couples. Trump proposed to quadruple that to $25,000 for an individual person and $50,000 for a couple, and if you add in the $4,000 personal exemption for individuals and their dependents, that means that an individual with income under $29,000 would pay no income tax under the Trump plan, and a couple would pay no tax as long as their income was under $58,000. That includes a very large share of the population, and the higher standard deduction would mean very few people would choose to itemize their deductions. They would instead choose to take the standard deduction. We estimated that only 3 percent of tax filers would choose to itemize their deductions under the Trump plan, compared to about 30 percent who itemize today. So, the big change in the standard deduction would simplify taxes for people because they wouldn’t have to itemize, and it would move a lot of people off the tax roles because it would zero out their taxable income. One big piece. The second big piece is the cut in tax rates. The tax rates he proposed in the fall were 10 percent, 20 percent and 25 percent, three brackets instead of the current seven. In Detroit, he raised those rates to match the ones in Congressman Ryan’s proposal, 12 percent, 25 percent and 33 percent. So, that would reduce the amount of revenue reduction, reduce the size of the tax cuts individuals would get, but still would be would be a substantial reduction from the current rates. The top rate would go from nearly 40 percent today to 33 percent under the Trump plan.
Jim Lange: Did you or anybody that you work with try to calculate what the impact on the economy would be in terms of deficits? Because I have read some numbers. On the other hand, I’ve probably read numbers from partisan sources.
Roberton Williams: Let me explain one more piece that’s important and then get to your question about total revenue. A second big piece is on the business side of the tax proposal. He would reduce the corporate tax rate from 35 percent to 15 percent, cutting it by more than half, and he would apply that 15 percent tax rate not only to corporate income, but also to individual partnerships, ‘freelancers,’ as he said in Detroit, anybody who’s got income from a small business or as a contractor, which would be a very large cut in tax rates for those people, and would induce many people who are currently drawing salaries as employees to become contractors. I, for one, would say to my employers here at the Tax Policy Center, “Please make me a contractor. I can face a 15 percent tax rather than the 25 or 30 or whatever I’m currently paying.” We did not estimate how many people would make that kind of change in our first estimate of the Trump proposal. We assumed, for the sake of argument, that for businesses to put in place to keep that kind of shifting of income to lower tax rates from happening. We’re not sure it actually could be done, but that’s what we did to simplify the analysis and to give the benefit of the doubt to the Trump plan. Given those assumptions, we estimated that the Trump proposal from last fall would lose about $9.5 trillion of revenue over the next 10 years. That’s nearly one quarter of the total revenue the federal government’s projected to collect over that time.
Jim Lange: Now, was that the original proposal?
Roberton Williams: That’s the original proposal.
Jim Lange: OK , all right.
Roberton Williams: We haven’t had time to redo the proposal under the new tax rates with the changes that Trump proposed in his Detroit speech.
Jim Lange: OK, but one thing that he did do, in his defense, unlike Hillary, is during the primary, he was what I would consider way out there, proposing something that you’re saying is going to cost $10 trillion, and then, in the general election, moving a little bit closer to the center, where Hillary didn’t move closer to the center at all. Is that a fair assumption?
Roberton Williams: Mrs. Clinton has promised more detail on her tax plan. As of now, we don’t know what that will be. Mr. Trump has shifted his tax plan a little bit, making it more responsible in terms of revenue loss, but it would still have a very large reduction in federal revenues collected. We don’t know how big it is yet without doing the estimates.
Jim Lange: OK. Well, this one might be a tough one, and maybe this one is difficult to answer in a non-partisan way, but I’ll give it a shot anyway. So, presumably, the theory behind reduced tax rates is that people will have more money and that they will spend more, and, in effect, everybody has more money, even forgetting the draconian cuts that he was talking about before, but let’s call it the Detroit cuts. People will have more money, and presumably, I don’t know if trickle down is accurate or not, they will spend more, the economy will grow, people will have bigger incomes, and the tax revenue will be neutral or even positive. Is that a partisan question to ask if that is a reality, or is that a fantasy that certain people have, or does it actually have some truth but not complete truth? How would you answer that question?
Roberton Williams: It’s hardly a partisan question, Jim. It’s a question of what actually would happen if we cut tax rates in terms of the overall economy. Our analysis of the Trump plan, as presented last fall, ignoring the slightly higher rates that he proposed in Detroit, were that he would lose $9.5 trillion of revenue. If he could make up that revenue by cutting spending or something else, then there would be no adverse effect on the economy from the cuts, and all the revenue going to people’s pockets, the taxes people didn’t have to pay to the government, could be used, as you say, to invest and grow the economy and give us a bigger economy, more income for everybody and more tax revenue. If that were the case, you might even find that the tax cuts pay for themselves. In fact, Trump proposed no specific spending cuts, and what he has said about spending would actually go in the other direction. He has said specifically that he would not reduce spending on Social Security or Medicare ? the two biggest pieces of the federal budget ? and that he would increase spending on the military. That leaves very little room in the rest of the budget to offset the very large revenue reductions, and our assumption was, if that were the case, that the plan would reduce revenues a lot, increase the deficit and make the government an even bigger borrower in private markets to get funds. If the government becomes a borrower, they’re competing for the funds that firms would want to borrow and invest, and it would be less likely that firms would borrow the money and be able to grow the economy. The government will be, in essence, taking money out of the economy to make up for the revenue losses, and then that effect on the economy would be essentially no positive gain in growth, and in fact, because the deficits would be larger, the government would in fact have to pay more interest, and that would draw even more money out of the private sector and potentially cause the economy to do worse. A recent analysis by Moody’s took a look at what the effect on the entire economy would be of the Trump plan, and they projected that the plan, in and of itself, without more on this cutting spending or doing something to make up for the lost revenues, would throw the economy into a recession, a deeper recession than we experienced a few years ago. So, the arguments that a tax cut would make the economy grow do not, in our view, apply in this case because there would be so much competition … by the government in the private sector for funds that would put a damper on economic growth rather than stimulating it. That doesn’t say that other tax cuts, or the kinds of tax cuts, or a tax cut accompanied by cutting and spending that would mean less effect on the federal deficits, could not have a growth effect on the economy. What it does say is the size of the Trump tax cut combined with the lack of spending cuts would likely have either no effect on the economy or perhaps a negative effect.
Jim Lange: All right, whereas maybe a more traditional Republican candidate would say, ‘Hey, we want to cut taxes, but we also want to cut spending,’ and you’re saying that might be a little bit more of a viable plan, rather than ‘We’re not going to really cut spending, but we are going to cut taxes.’ There’s not going to be any way to make up for it. There’s not going to be any trickle-down effect. We’re going to have to borrow more money to pay our expenses, and in the short run and in the long run, that’s a bad thing. Is that fair?
Roberton Williams: That’s a good summary of what I had to say. Because we don’t have another plan to evaluate, we can’t say what would happen if this were a different one. But what we’ve seen of the Trump plan so far, we do not anticipate significant economic growth, and certainly not enough to pay for the revenue losses.
Jim Lange: So Bob, you said that, in effect, reducing the tax rates in and of themselves without an accompanying cut in government spending wouldn’t necessarily stimulate the economy that would more than compensate for the tax cuts. Let’s take the other side of the coin. Would Hillary’s tax increases for the wealthy and reducing the deductions to 28 percent, could that have a potential negative impact that could potentially reduce growth because people will not have as much money to spend?Roberton Williams: Well, it’s certainly possible if you take money out of people’s pockets and they’ll have less to invest. Less investment means slower economic growth. The real question is: Is it a big enough effect to drive people’s behavior? And we don’t really know. It depends a lot on the individual’s situation. It depends a lot on the larger economic climate. If you think about the current situation, businesses are sitting on very large piles of cash. It’s estimated that firms have more than $2 trillion sitting overseas with the idea that bringing it home when there’s a cheaper opportunity. Firms have very large piles of cash at home that they’re not investing because they don’t see the economic opportunity. The more important issue in investment than taxes or how much you’re going to get to save out of your investment is whether or not there’s a good economic opportunity, whether there’s a good business opportunity, and starting a new bakery, for example, or a new fast-food franchise, is there going to be demand for that? Can I make the business go in today’s economic climate? And that’s really what’s been holding the economy back in the last few years. We haven’t seen the growth coming out of the recession that we would’ve liked. We certainly generated a lot of jobs, not necessarily as good a jobs as we would’ve liked. Wages are not going up as fast as we’d like, but the question of investment is more a function of, ‘Do we want to invest in this economic climate or not?’ If people have confidence that the economy is going to grow, if people have confidence that there’ll be customers for their businesses, they’ll invest. If they don’t have that, it doesn’t matter what the tax rate is. Tax on zero profit is no tax at all. A high tax, a low tax, if you don’t have any profits, it doesn’t matter. So, the real question is: What’s the economic environment look like?
Jim Lange: Well, let me ask you another question. So, right now, there’s obviously very, very significant differences between Hillary’s plan and Donald Trump’s plan, and one of the two will obviously be elected in the fall, and they will presumably try to implement their plan, and I know that there are certain questions as to what’s going to happen to … I don’t know how much question there is to the House, but there is some question as to whether the Senate will turn Democratic. But does it really matter all that much? Isn’t this, to some extent, going to be controlled by Congress anyway? And while it’s great to talk about this, really, in the end, it’s going to be Congress that’s going to be voting on this, and they’re not going to allow Hillary to make her huge tax increases, nor will they allow Trump to make his huge tax cuts, and that we’re going to have something closer to the status quo no matter who wins? Is that fair, or is that not really fair?
Roberton Williams: Well, there’s no question that the president has to get the approval from Congress for any tax changes. It’s a compromised agreement between the two. Let’s turn back the clock 30 years to 1986 when we last had tax reform. That tax-reform package involved a three-year negotiation among President Reagan, Dan Rostenkowski, the Democratic chair of the House Ways and Means Committee, and Bob Packwood, the Republican chair of the Senate Finance Committee. Those three individuals negotiated for a three-year period what the tax reform would be, what rates would be, how many tax brackets we’d have, how we pay for it. The big difference then compared to now is there was agreement that taxes would be raised on corporations in order to pay for a large tax cut on individuals. As a result, the individual side of the tax reform was essentially a tax cut for virtually every taxpayer. If you have tax cuts across the board, everyone sees lower taxes, it’s a lot easier to get agreement that, ‘Hmmm, not a bad tax deal. I’m happy to pay less tax.’ The difference between then and now is the view is not we can raise taxes in one segment or the other of the tax system. Each segment, the corporate sector and the individual side of the tax system, is supposed to have a revenue-neutral tax change, ‘revenue neutral’ meaning that any tax cuts have to be offset by tax increases somewhere else. We have no change in the total revenue on either the individual side or the corporate side. And the problem with that is, once you say you have to have no change in revenue, tax cuts for Person A means a tax increase for Person B. You have to make up the loss in revenue from cutting one person’s taxes by raising someone else’s taxes, and as soon as you create losers in a tax reform, you have a lot more political difficulty getting things through. But the bottom line and an answer to your question, can the president do it on his own? No, he can’t. Thirty years ago, Ronald Reagan had his own plan for what he wanted to do with taxes, he adapted that plan to fit the demands of Bob Packwood in the Senate and Dan Rostenkowski in the House, and he was able to get through a substantial tax reform with approval in both houses of Congress.
Jim Lange: So, is basically what you’re saying is, ‘Hey, neither one of them are going to get what they want, and it’s going to be held up by Congress?’ Yes, they might have some sway, but when it really comes down to it, for the average Joe going about his life, that it will not have as dramatic, certainly in the short term, tax impact as to who wins the presidency.
Roberton Williams: Who wins the White House will determine the first bargaining chip put down in tax-reform debate come the new Congress. Paul Ryan has put down his bargaining chip already with his tax plan and, presumably, someone in the Senate on the Senate Finance Committee will put down a plan there. Whether it be a Democrat or a Republican depends on the outcome of the election. If it’s a Democratic swing in the Senate, then Ron Wyden from Oregon will become chair of the Senate Finance Committee. He has his tax plan. Otherwise, it could remain in the hands of the Republicans and would be a Republican plan. But you’d again have three different places, the Senate, the House and the White House, each with an opening bid in the discussion of tax reform. What we do know is there’s great agreement that we need tax reform, that we have a very complicated tax system, and particularly on the corporate side, there’s agreement that we need to bring down the high corporate tax rate. The U.S. corporate tax rate is currently 35 percent, the highest statutory tax rate of any major industrialized country. Everybody else has come down below us. When we set the 35 percent rate 30 years ago, we were amongst the countries with the lowest rate. But in the intervening years, other countries have dropped their rates down and they’re now below us. We need to bring our statutory rate more in line with other countries, and we need to pay for that by changing the tax preferences we have built in the corporate tax system. Everyone agrees to that. I think the general agreement that we need to bring the rate down and pay for it with some broadening of the base. But the details of that differ quite a bit across plans. Because there is agreement, we may well see some focus on corporate-tax reform as a first step towards broader tax reform that would spread to the individual sector. The problem with that is you can use the corporate-tax reform as a hostage to get individual-tax reform. If you do the corporate reform by itself, there’d be less pressure to change things on the individual side because you already solved half the problem. We’ll see what happens. It’s a political question. I’m an economist, not a political scientist. I can’t address that one very well. But it certainly is the case that it will be bargaining between the Senate and the House and the White House, each having its own say in the process.
Jim Lange: Why don’t we tell our listeners where they can read more of this type of objective analysis, whether they’re best off going to a website, or if there’s a book that you’re going to recommend, but I would imagine your website would be the best. So, why don’t we tell our listeners that want more information where they could find it?
Roberton Williams: Well, all the work we do at the Tax Policy Center is on our website at www.taxpolicycenter.org. You’ll find there our blog called TaxVox, where two or three times a week, we write something about a current tax issue. We also have a very useful tool that I helped put together, what we call the Tax Policy Briefing Book. It walks through in a Q&A form a whole series of issues related to the federal tax system and the state tax system, saying ‘How do things work? How does the estate tax work? What is the payroll tax? What provisions do we have that help people pay for child care?’ ? major issue in Donald Trump’s discussion in his Detroit speech recently. So, if people want information about how the tax system works, the Briefing Book is a very handy way to take a look at things. We also have a section on the election. We analyzed a number of the candidate’s tax proposals during the primaries. We have, on the website, our detailed analysis of the Trump plan as presented last year and the Clinton plan as presented more recently. We will update those analyses as we have more information. We hope to do so in light of the Trump speech in Detroit. We’ll get that up shortly, and if Mrs. Clinton offers more details on her tax plan, we’ll do that, too. One thing you mentioned at the outset in describing what I’ve done, we have a number of small tax calculators on the website that allow you to take a look at particular parts of the tax system and see how they might affect you. Two in particular that are very popular, take a look at the tax penalty in the Affordable Care Act if you don’t have adequate health-insurance coverage for the year. A second popular calculator is what we call our marriage bonus and penalty calculator. Marriage bonus and penalties are a rather odd piece of the tax code where being married can cause you to claim more or less tax than you would have paid if you’d remained single and paid taxes as individuals. In any case, these are various things that are available on our website www.taxpolicycenter.org.
Jim Lange: You did mention the marriage penalty, and probably if I was maybe a little bit more of a considerate guest, I would just let it go, but to me, there are two other huge issues if you’re thinking about getting married and you’re thinking about the economics or the taxes of it, and particularly for older and wealthier people, there are some enormous advantages in the form of Social Security for getting married, and I know that that’s not tax, but I’ll just say that there’s both marital benefits while both spouses or partners are alive, and enormous benefits if the spouse with the higher earnings record dies first if they were married, compared to if they weren’t married, and the second thing relates to when you leave money to … there’s an enormous difference between leaving money, and particularly IRA money, to a spouse as opposed to a partner, both for federal and state inheritance-tax purposes. Now, I’m not saying that income taxes aren’t one very important issue, and particularly for people who are younger, where Social Security and estate planning might not be as important. But I would say that you have to take those into consideration. I know you have written on this topic. Do you have any other, let’s say, financial marital advice? And why don’t we assume a little bit older and a little bit wealthier for the purpose of the question?
Roberton Williams: I think it’s important to say that the decision to marry or not is based on lots and lots of criteria, of which tax is one small piece. Deciding what you’re going to do with your wealth, who’s going to inherit it from you, what’ll happen to your retirement accounts, all are very important questions, and they’re very important social questions. Let me tell you, if Mom’s involved in the question about whether you get married, Mom will say, ‘Yeah, get married!’ So, that’s a much more important question maybe than some of the economics. But the economic questions are things that you should keep in mind, deciding what you want to do with life in general.
Jim Lange: Fair enough. OK, let’s go back to, let’s say, some of the things that we were talking about before. You had mentioned that the United States now has one of the highest corporate-income tax rates in the world, even though 30 years ago, it was one of the lowest. Could you make a general comparison as to our individual rates, let’s say, compared to the developed world, other countries? Are we a highly taxed people? Are we in the middle? Are we actually not doing as badly as we thought? How do we rate with other developed countries?
Roberton Williams: Well, we’re a relatively low-taxed country compared to others. If you can put us in line with other developed countries, we are third from the bottom of the major developed countries in the world in terms of our overall tax rate, tax as a share of total gross domestic product, or GDP. Only Chile and Mexico have lower tax rates than we do. In 2012, which is the most recent year for which we have data available, the United States tax rate is about 24 percent of GDP. The overall average for developed countries is about 34 percent, almost half again as large, and at the very top of the list are countries like Denmark and France and Belgium where the tax rates exceed 40 percent of GDP. Now, there’s a big difference between the countries. Those countries provide a lot more in terms of social services. Retirement funds are a lot larger. They provide much cheaper health care, much of it subsidized by the government. Retirement is bigger. School is often free. So, it’s kind of a ‘get what you pay for,’ but in terms of taxes, the United States is toward the bottom of the list with its 24 percent of the GDP as an overall tax rate.
Jim Lange: Well, my next question might have something to do with that. As you may or may not know, I am a big proponent of what we call running the numbers to determine whether, and if the answer’s yes, how much of a Roth IRA conversion to make. And one of the issues that people face is, ‘Oh, OK, if I make a Roth IRA conversion and I pay the tax, all the numbers that our office ran will often show that that’s a great thing if tax rates are stable, and it’s a fabulous thing if they go up over time.’ But if they go down, theoretically, let’s say somebody now makes a Roth IRA conversion and they pay at, even say, 28 percent or 35 percent, and later, maybe Trump wins, or, for some reason, the rates are a lot lower. Do you have any instinct or ideas of what you think is going to happen long-term in terms of federal income-tax rates?
Roberton Williams: I do, actually, and largely, it’s a function of the projections of federal budgetary deficits looking out 10, 20 years. We currently are running relatively small deficits. Two or 3 percent of GDP is our deficit every year. We’re adding very little to our debt as a share of GDP because the economy’s growth roughly matches our deficits, maybe a little less, so we’re building a little bit of debt. But if you look out 10 years, as the retirement of the baby boomers becomes more fully developed, and we have a smaller work force relative to the number of retirees to support the retirement programs Social Security and Medicare, the deficits will get much larger at the federal level, and there’ll be much more pressure to raise taxes to pay for the benefits we’ve promised. Now, obviously, another solution would be to cut spending, to cut Social Security benefits and cut Medicare benefits, do other things to reduce the amount of spending the government does. But if we project out the kind of spending we’ve got right now, there will be a need for more revenue, and as a result, taxes are almost certain to go up. So, if I were a betting man, and every once in a while, I do bet with my long-term investments, I would bet that tax rates in the future will be higher than they are today. No guarantees, but that’s what we see on the horizon.
Jim Lange: OK, and let’s assume, for discussion’s sake, that somehow, the United States is going to need more money and that they’re not going to be successful in cutting expenses where they traditionally have not been. Could you picture a federal sales tax or value-added tax perhaps, in addition to the income tax, or do you think that the income tax, in some form similar to what we know right now, is going to be the dominant tax?
Roberton Williams: Well, the United States is very much in the minority in terms of not having some sort of national sales tax. Most European countries, mostly all countries, have a value-added tax that essentially taxes every transaction in the economy, and that’s a major revenue producer for those other countries. The standard joke about that is the reason we don’t have a value-added tax right now is the Republicans think it will just be raised over and over again and boost taxes. The Democrats don’t like the fact that it’s regressive, and as soon as the Republicans figure out it’s regressive and the Democrats find out it’s a cash cow, we’ll have one in a minute. That’s attributed to a number of people, including Larry Summers, who was treasury secretary under President Clinton. Do I believe any of that? No. We’re likely to have one because we’ll need revenue. The big problem with a sales tax is it is regressive; that is, lower-income people pay a larger share of their income in sales taxes than do higher-income people because low-income people spend more of their income. They don’t save the way that wealthy people are able to save. The solution to that is fairly simple. You need to do some redistribution of the revenues to offset the cost for low income people. But some sort of national sales tax would make sense in the long run, and I expect we’ll have one.
Jim Lange: This has been some wonderful information, and Bob, we are unfortunately at the end of the show, but if you could just give the name of your website for people who are interested in some of the articles, some of the blogs, some of the calculators that you had mentioned, and are just interested in, let’s say, looking at their own personal situation with, let’s call it, the Clinton plan or the Trump plan. Can we have your website one last time, please?
Roberton Williams: Yeah. Our website is www.taxpolicycenter.org. Wander around there and take a look. It has a wealth of information.
Jim Lange: Well, thank you, Bob. You have been a wealth of information on this show. Thank you very much.
Roberton Williams: It’s my pleasure. I enjoyed it.
Dan Weinberg: Special thanks as always to the Lange Financial Group’s marketing director, Amanda Cassady-Schweinsberg, and to KQV’s Amy Valella in master control. I’m Dan Weinberg. For Jim Lange, thanks so much for listening and we’ll see you again for another new edition of The Lange Money Hour, Where Smart Money Talks.END
Learn More about Lange Financial Group, LLC
Fill out the form below to get timely advice or to learn more about us. You'll also receive a free summary of our latest book, Retire Secure! Third Edition.
Sign Up Today and Get your FREE Bonus!
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.
Learn More about Lange Financial Group, LLC
Get timely advice! You'll also receive a free summary of our latest book, Retire Secure! 3rd Edition.
Need a Keynote Speaker?
James Lange, CPA Nationally-Acclaimed Roth IRA Expert,
Best-Selling Author & Keynote Speaker
Training Your Financial Advisors on the Latest, Cutting-Edge Roth IRA Conversion Strategies
Jim Lange - Now Available to Train YOUR Team
» Learn More