But spokesmen for both of the leading candidates for the Democratic presidential nomination said this week that they could take executive action, bypassing Congress, to go after a shorter list: the carried-interest tax advantage that investment-fund managers receive, corporate inversions that companies use to move their tax addresses offshore and — in Sanders’s case, at least — a few other parts of the tax code that benefit high-income taxpayers.
Their larger plans for individual income taxes include Sanders’s proposal to increase income-tax rates to levels unseen since 1981 and Clinton’s pitch for a 4 percent surcharge on the nation’s 34,000 or so highest-income taxpayers. Those are almost certainly dead on arrival. Without them, neither candidate could raise enough to finance their most expensive programs.
“All of the things Clinton and Sanders are proposing require Congressional approval,” said Eric Todor, the co- director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.
Presidents have more room to sidestep Congress via executive action in corporate and business-related tax matters, Todor said — but “only things that might involve an interpretation of the law as opposed to changing the actual law.” That might include the carried-interest tax advantage, he said. “But it would surely raise questions.”
Carried interest is the portion of profits from investment funds that are paid to investment managers as compensation. Those payments are currently taxed at the preferential capital gains rate, which tops out at 23.8 percent on investments held more than a year. That’s well below the top rate on ordinary income, 39.6 percent.
The congressional Joint Committee on Taxation estimated last fall that taxing such pay at ordinary rates would generate $15.6 billion in revenue over a decade.
‘Service Providers’
Warren Gunnels, a senior policy adviser to Sanders, cited a 1984 tax law that authorized the Treasury Department to designate fund managers as “service providers” instead of clients’ partners, making them subject to having their compensation taxed at the ordinary rates. Victor Fleischer, a tax law professor at the University of San Diego, has written that the 1984 law provides a basis for addressing carried- interest through executive orders. A Clinton campaign spokesman, who asked not to be named, said Clinton would also use executive action to end the carried-interest tax treatment.
Both candidates have also said that if Congress won’t take action to restrict inversions — the practice of moving a U.S. company’s tax address offshore by merging with a foreign company — they’d take steps to curb the practice with executive orders. Congressional leaders have said they want to restrict inversions as part of a tax overhaul. President Barack Obama took some initial steps to limit inversions in 2014 through an executive order.
Beyond that, Sanders has identified four other corporate “loopholes in our tax code” that his campaign now says he’d close with executive orders if Congress didn’t act. They include check-the-box elections, which allow multinational corporations to choose how their subsidiaries will be classified for federal income-tax purposes, and have enabled many to defer taxes on billions of dollars in earnings.
In a letter to Obama last year, Sanders urged the president to act on the four items — and on carried interest and inversions — saying that all together, they’ve been estimated to raise more than $100 billion over a decade.
Clinton has described her own plans for targeting certain tax breaks, though her campaign declined to say whether she’d try to use executive orders on them. She wants to limit the ability of the wealthy to build multimillion-dollar, tax- deferred retirement accounts, which she calls “the Romney loophole.” (Former Massachusetts governor Mitt Romney, the 2012 Republican nominee, disclosed during the campaign that he had amassed as much as $102 million in an individual retirement account, in which investment gains aren’t taxed but annual contributions are capped at $6,500.)
Though she called this month for “immediately closing” the ability to build such large IRAs, Clinton hasn’t spelled out how. Likewise, Clinton wants to prevent hedge funds from routing investments through Bermuda-based reinsurance companies as a means of reducing income taxes, but hasn’t said how she’d try to accomplish that.
Centerpiece Proposals
Clinton’s campaign hasn’t broken out the revenue that would result from ending those two tax advantages, but says her tax plans overall — most of which would require congressional approval — would raise $400 billion to $500 billion over a decade. One of her centerpiece proposals — to offer debt relief on student loans, ensure that students can attend public colleges and universities without taking new loans and make community colleges tuition-free — would cost $350 billion over a decade. It would be paid for by “limiting certain tax expenditures for high-income taxpayers,” according to Clinton’s campaign website.
Sanders, meanwhile, is talking about raising trillions. His own tuition-free plan for state colleges and universities would cost $75 billion a year, but his most expensive proposal would create a $1.38 trillion-a-year, single-payer health insurance system that he calls “Medicare for all.”
To fund the health plan, Sanders has said he’d rely in part on a 2.2 percent income tax, which would apply to all taxpayers. Sanders’s campaign says the impact on lower- and middle-income people would be lessened by deductions and exemptions, and further offset because they’d no longer pay private health- insurance premiums.
Clinton has repeatedly said she won’t raise taxes on the middle class — broadly, anybody making less than $250,000 a year. Sanders’s tax proposals, including a payroll tax that would fund his proposed family and medical leave program, would touch the middle class. But they’d also hit well-off taxpayers harder than Clinton’s.
Consider the candidates’ proposals to raise the capital gains tax rate, currently 23.8 percent on long-term gains. Sanders would simply tax investment income at the same rates as wage income for people who make more than $250,000 a year. He also wants to raise tax rates for people who earn above that level, setting a top marginal rate of 52 percent for people who make more than $10 million a year. His plans theoretically would more than double the capital gains rate paid by those in the highest tax bracket, said Kenneth Scheve, a political science professor at Stanford University who works on economic inequality issues.
Clinton has an interlocking set of proposals that would also raise the rate. First, she supports the Buffett Rule, named for billionaire investor Warren Buffett. It holds that anyone making more than $1 million a year, through investment gains or otherwise, would pay a tax rate of at least 30 percent. Then there’s Clinton’s 4 percent “fair share surcharge,” which would apply to anybody making more than $5 million a year from wages or investments.
In combination, the two changes are “like raising the capital gains rate without raising it,” said Jared Bernstein, a senior fellow at the non-partisan Center on Budget and Policy Priorities, and a former economic adviser to Vice President Joe Biden.
Investment Gains
In addition, for Americans in the highest tax bracket, Clinton wants to increase the taxes due on any investment gains they realize within six years of buying an asset. Currently, such investors pay a 43.4 percent rate on any assets held less than a year. Clinton would extend that rate to assets held less than two years. After that, she’d drop the rate to 39.8 percent. Only after six years would the rate reach 23.8 percent. The plan is designed to encourage longer-term thinking among investors.
Under the current rule, someone who has realized $5 million in net long-term capital gains would owe $1.19 million in tax. Under Clinton’s plan, the bill would increase to $2.37 million. Under Sanders, it would be $2.51 million.
Clinton’s plan would lead investors to postpone realizing their gains — and would therefore reduce capital-gains tax collections by $374 billion over 10 years, according to an analysis released Tuesday by the Tax Foundation, a research group whose board of directors includes corporate executives. The group has not yet published an analysis of Sanders’s proposals.
Clinton’s tax plans, which would also cap itemized deductions that tend to benefit higher-income taxpayers, appear to raise $498 billion over 10 years, according to the foundation’s analysis. But the group’s report also said Clinton’s proposed tax increases would reduce U.S. gross domestic product by 1 percent over the long term — resulting in actual collections of $191 billion over the next decade.
Brian Fallon, a Clinton campaign spokesman, called the analysis misleading and said it didn’t account for elements of her plan that offer tax relief, which include a tax credit on health costs of up to $5,000 for middle-class families. He also criticized the Tax Foundation’s contention that higher taxes would limit growth. The campaign cited a controversial 2012 report by the Congressional Research Service that said 65 years’ worth of data “suggests the reduction in the top tax rates have had little association with saving, investment or productivity growth.”
In another area, estate taxes, Sanders would also go after the wealthiest taxpayers more aggressively than Clinton. They both want to reduce the threshold at which estates are subject to the tax — to $3.5 million for individuals or $7 million for married couples, down from $5.45 million and $10.9 million currently.
But Clinton wants to raise the rate to 45 percent, from the current 40 percent; her campaign has estimated that the change would raise $200 billion over 10 years. Sanders proposes the same 45 percent rate on estates worth $3.5 to $10 million, but would increase the rate to 50 percent for those worth between $10 million and $50 million. Those worth more than that would be taxed at 55 percent, and his plan tacks on a surtax of 10 percent for the 550 or so American families with estates worth more than $1 billion.
“There is evidence that higher estate taxes reduce wealth inequality, and Sanders’s increase is substantially more than Clinton’s," said Stanford’s Scheve.
Both proposals would face strong opposition in the House, which voted in April, 240-179, to repeal the estate tax.
