Updated Analysis of Hillary Clinton's Tax Proposals

AN UPDATED ANALYSIS OF HILLARY CLINTON’S TAX PROPOSALS Richard Auxier, Len Burman, Jim Nunns, Ben Page, and Jeff Rohaly October 18, 2016 ABSTRACT This paper updates an analysis of Hillary Clinton’s tax proposals, which would raise taxes on high-income taxpayers, increase the child tax credit, modify taxation of multinational corporations, reform capital gains taxes, and increase estate and gift taxes. Nearly all of the tax increases would fall on the highest-income 1 percent; on average, low- and middle-income households would see small increases in after-tax income. Marginal tax rates would increase for high-income filers, reducing incentives to work, save, and invest, and the tax code would become more complex. Her proposals would increase revenue by $1.4 trillion over the next decade, before accounting for reduced interest costs and macroeconomic effects. Including those factors, the federal debt would be reduced by at least $1.5 trillion over the first decade and by at least $5.4 trillion by 2036. An earlier version of this publication was released on October 11, 2016. This revised version includes macroeconomic estimates of Hillary Clinton’s tax proposals, modeled in partnership with the Penn Wharton Budget Model. We provide dynamic scoring estimates of Clinton’s tax proposals using two new models: TPC’s short-term Keynesian Model and the Penn Wharton Budget Model’s Overlapping Generations Model. We are grateful to Howard Gleckman, Robert Greenstein, Chye-Ching Huang, Joseph Rosenberg, Eric Toder, and Roberton Williams for helpful comments on earlier drafts. Yifan Zhang prepared the draft for publication and Devlin O’Connor edited it. The authors are solely responsible for any errors. The views expressed do not reflect the views of the Clinton campaign or those who kindly reviewed drafts. The Tax Policy Center is nonpartisan. Nothing in this report should be construed as an endorsement of or opposition to any campaign or candidate. For information about the Tax Policy Center’s approach to analyzing candidates’ tax plans, please see http://election2016.taxpolicycenter.org/engagement-policy/. The findings and conclusions contained within are those of the authors and do not necessarily reflect positions or policies of the Tax Policy Center or its funders. TAX POLICY CENTER | URBAN INSTITUTE & BROOKINGS INSTITUTION 2 Presidential candidate Hillary Clinton has proposed a series of tax changes that would raise taxes on high-income filers, increase the child tax credit, reform international tax rules for corporations and capital gains taxes, and increase estate and gift taxes. This analysis updates the Urban-Brookings Tax Policy Center’s (TPC) March report1 on Clinton’s tax proposals—including new revenue, distribution, and marginal tax rate estimates that reflect updated economic assumptions. This report includes Clinton’s new proposal to increase the child tax credit, raise estate tax rates, reform capital gains taxes, change the net investment income tax and self-employment taxes paid by high-income individuals, and several small business tax proposals. TPC estimates that Clinton’s proposals would increase federal revenue $1.4 trillion over the first decade and an additional $2.7 trillion over the subsequent 10 years.2 Including interest savings, the proposals would decrease the debt $1.6 trillion over the first 10 years. TPC, in collaboration with PWBM, also prepared two sets of estimates of Clinton’s proposals that take into account macroeconomic feedback effects.3 Both sets of estimates indicate that the plan would reduce GDP in the short run, decreasing the amount of revenue raised by the plan. However, including lower interest costs, the federal debt would still decrease by $1.5 trillion, even with slightly negative macroeconomic feedback effects on revenues. By 2028, the PWBM indicates that GDP would be larger than it would have been without the plan, because smaller budget deficits would free up savings to finance private investment, and the federal debt would decrease by $5.4 trillion by 2036. These estimates are sensitive to assumptions about how savings, investment, and labor supply would respond to policy changes like Clinton’s tax plan, so the effects on GDP could be larger or smaller in both the short- and the long-run. In addition, Clinton's spending proposals would negate the budget savings, meaning that the macroeconomic effect of the whole plan—including both tax and spending proposals—would be negative. Nearly all of the revenue gain would come from individual income tax changes that affect high-income taxpayers. The highest-income 1 percent of households would pay more than 90 percent of the proposed tax increases, reducing their after-tax income by an average of 7 percent. Clinton’s proposals would decrease incentives for high-income households to work, save, and invest. On average, the proposals would increase after-tax income for low- and middle-inco