This election season has been simply the story in the United States if not the world. The emergence of billionaire Donald Trump and the presence of Hillary Clinton are providing the media with great story lines and captivating, if not sometimes crude, sound bites. Sadly, the noise level has grown to such heights that the actual policy stances of these candidates gets lost. While the media focuses on email servers and candidates’ sweating patterns, investors need to have the specific the frontrunners’ business policies and understand how these will impact economic growth and jobs.
Key Points: Trump uses incentives and large deficits/debt to gain large economic and job growth. Clinton uses dis-incentives with higher taxes coupled with large spending to achieve social goals income equality and clean energy.
Trump Top 3 for business: 15% C corp rate, capped 15% pass-through rates, balloons debt/deficit.
Clinton Top 3 for business: No change to tax rates, big infrastructure spending, debt/deficit shrink slightly.
Like most Republicans, Trump’s plans focus on business/corporate tax and economic changes to stimulate growth in GDP and jobs. First, he wants to reduce the nominal corporate tax rate from 35% to 15%. Next, he wants to limit the pass-through entity (LLCs, partnerships, Subchapter S) to 15%. For international tax purposes, he has a one-time 10 percent tax on all foreign profits currently held overseas, which are estimated to be over $2.3 trillion. Lastly, he wants to eliminate all other corporation tax expenditures or breaks, he wants to eliminate the corporate Alternative Minimum Tax, and he wants to substantially reduce the deductibility of interest expenses from debt.
He eliminates the estate tax and taxes carried interest at ordinary income rates. While Trump is tough to nail down on issues, he has said he supports energy production and would sign into law the Keystone XL pipeline from Canada. On capital gains, Trump has said he would eliminate the Obamacare 3.8% tax hike on the net investment income. Coupled with his tax cuts for individuals, Trump’s plans expand economic growth (+11% GDP) and job creation (5.3mln) over ten years. Yet, the US debt (+$11.98T) and deficit will expand rapidly as well if his full plans for both corporate and individual plans are implemented, according to think tanks like the Tax Foundation and the Tax Policy Center.
Like most Democrats, Clinton’s plans focus on direct government spending to stimulate growth in GDP and jobs. She has no change to the corporate tax rate or the pass through rate. She has new corporate tax credits (15%) for incenting companies to provide their employees profit sharing and apprenticeships. Clinton has a $275 billion infrastructure spending plan to create jobs and increase efficiency in the economy through better roads, bridges and tunnels. As well, her plans include a $25 billion infrastructure bank to support “critical infrastructure improvements” and reauthorize a Build America Bonds program to help finance projects. On international tax issues, she keeps the current structure and adds three proposals tied to specific goals: broadens definition of an inversion transaction, attempts to stop “earnings stripping” by limiting US interest deductions and adds an “exit” tax on US companies re-domiciling to lower corporate tax countries like Ireland.
She wants to spend additional funds on clean energy and scientific and medical research. Recently, she has stated she wants to stringently regulate the process of fracking to ensure reduction of the release of methane or eliminate water contamination. To accomplish these goals, she raises taxes in many places to pay for the spending. The majority of the revenue raised by Clinton would come from three areas: a cap on itemized deductions, the Buffet Rule, and a 4% surtax on taxpayers with incomes over $5 million.
For investors, she has a new long-term capital gains tax rate schedule. Under this plan, her stated goal is to incent investors to extend the holding periods for investments and to dis-incentivize short-term profit taking.
According to the Tax Policy Center, Hillary Clinton proposes raising taxes on high-income taxpayers, modifying taxation of multinational corporations, repealing fossil fuel tax incentives, and increasing estate and gift taxes. “Her proposals would increase revenue by $1.1 trillion over the next decade. Nearly all of the tax increases would fall on the top 1 percent; the bottom 95 percent of taxpayers would see little or no change in their taxes. Marginal tax rates would increase, reducing incentives to work, save, and invest, and the tax code would become more complex.” Over ten years, the Tax Foundation scores the plan mildly negative for the economy (-1.0%), mildly negative for jobs (-311k) and mildly negative for the US budget deficit (-$374 billion). However, the Tax Policy Center states that her plan would reduce the federal debt by over $1.2 trillion over the 10-year budget window.
On trade, both Trump and Clinton are against the free trade pact called the Trans Pacific Partnership or TPP. This free trade pact is a long term positive for the US economy with 18,000 tariff cuts for US businesses. Trump goes further to say he would attempt to tear up other free trade agreements like NAFTA.
Trump vs. Clinton
Clearly, the candidates have a carrot vs. stick approach to making policy changes to the US economy. Trump uses the carrot approach and cuts corporate, pass-through, and international tax rates to generate growth. To accomplish this (and coupled with his individual tax cut plans), Trump vastly expands the US deficit and debt. Clinton uses the stick approach and raises taxes to enact spending plans on infrastructure, clean energy and scientific/medical research. To achieve her goals (and coupled with her individual plans), Clinton significantly raises taxes on the top 10% of income earners, increases regulations and rules in the tax code, but does reduce the US federal debt.
Overall, this is a trade-off between Trump’s short-term rapid growth and long-term debt expansion and Clinton’s essentially static growth with a $1 trillion long-term debt reduction.