Election Insights | Whose Plan Wins? Trump vs. Harris on Taxes

What do the contrasting tax proposals of Vice President Kamala Harris and former President Donald Trump mean for Americans as the 2024 election approaches? 

In this episode, we dive into the Tax Foundation's modeling of both candidates' plans, shedding light on how these proposals could impact Americans. 

Joining Kyle Hulehan is Erica York, Senior Economist and Research Director. Together, they'll chat about the major economic implications of each candidate’s proposals, from national debt to economic growth.
 
 Links:

https://taxfoundation.org/research/all/federal/kamala-harris-tax-plan-2024/ 

https://taxfoundation.org/research/all/federal/donald-trump-tax-plan-2024/ 

https://taxfoundation.org/research/federal-tax/2024-tax-plans/ 

https://taxfoundation.org/blog/trump-overtime-tax-exemption/ 

Transcript

Kyle Hulehan: 0:00

Hello and welcome to the deduction a tax foundation podcast I'm your host kyle holohan and we are back again today with another election episode with my co host erica york Senior economist and research director here at the tax foundation. You guys are all familiar with her at this point And I want to just dive right in and Remember guys, these are just these 10 minute episodes. We're trying to speed everything up to get you everything you need to know about the election and taxes right now. And you know, kicking things off with our segment that we call what's in the news and Donald Trump is really keeping us on our toes here at the tax foundation with a lot of different proposals, which I don't mind. I, I simply would ask that maybe he keep it to like announcements on a Monday instead of a Friday, but that's just a personal thing. Um, so Donald Trump recently came out with, uh, an overtime pay exemption idea, and that could reshape. You know, some of the labor markets or government revenue, uh, Erica, could you explain this to us

Erica York: 1:04

Yeah, so Trump came out with an idea on a Friday, I think, to exempt overtime from all taxes. Now, presumably, this would be income taxes as well as payroll taxes, but he hasn't totally specified that, but has hinted toward that. Now, if we think about who earns all Overtime pay, um, you might think just, you know, a lot of people work overtime, but there are actually some pretty complex regulations that require certain employers for employees in certain situations to be paid time and a half for any hours worked over 40 hours a week. These are primarily hourly employees, so that's where we see. Most overtime pay happening, but it's true for some salaried workers as well. Now, if we just took current amounts of overtime pay, we can pull this from the Bureau of labor statistics. They estimate that roughly 3 percent of employer compensation costs go toward overtime pay, or about 4%, a little more than 4 percent of salaries and wages are overtime pay. If we said, okay, that amount right there no longer faces income and payroll tax. Okay. That would reduce federal revenue by about one and a half trillion dollars over 10 years the budget window that congress uses But like I said earlier, you know, most salaried employees right now don't get time and a half pay There would be a really big incentive for salaried workers or hourly workers who don't currently qualify for that To work with their employer and get into an arrangement where they would qualify for overtime pay We've estimated that if If something like that took place, um, just recharacterization of pay that the cost on this could nearly double to about 3 trillion over a decade. And that's before figuring in any additional behavioral estimates like workers on the margin working a couple more hours of overtime because they know that that would be totally tax free. So that would increase the cost even further. What this adds up to is a very expensive tax cut. That primarily encourages gaming and recharacterizing how you earn your income. Even though it would have some positive economic benefit, increasing hours worked to some extent, I think the biggest effect here would be the gaming, and it would be a very big cost too. So this is another tax policy proposal on top of trillions of others that doesn't add up to a really impressive economic effect.

Kyle Hulehan: 3:27

is a lot of money. And sometimes I just feel like these ideas are not often as serious as we would like them or as plausible as we would like them to be. And, you know, we're on Donald Trump right now. So we might as well just dive all the way in recently. We've. We've modeled some of Donald Trump's proposals, you know, more holistically. Um, and so I, I want to dive into that. So according to the tax foundation's model, you know, could his ideas on the economy, what do they mean for national debt? You know, are, are we trading one challenge, you know, for another, or is there some sort of silver lining in some of his proposals that we modeled?

Erica York: 4:03

So we published this analysis before the overtime tax idea, but I think it fits in with the themes of what else we've seen promised from Trump. And first, that's permanence for the 2017 tax law that he signed when he was president then that is expiring at the end of next year. So permanence for that, the individual provisions, the state tax provisions and the business provisions would cost on its own about 4. 2 trillion. And then from there, we've seen Trump outline additional tax cut promises, whether it's the idea of no tax on tips, no tax on overtime, no tax on Social Security. That adds trillions more to the cost, and then to offset that cost, he has promised a rollback of the green energy tax credits that were in the inflation reduction act as well as more distortionary taxes on imports or tariffs, the potential of a 60 percent tariff on everything from China. Or 10 to up to 20 percent tariffs on absolutely everything we import. The net effect of that would still be higher deficits. Um, the clawbacks of the credits and the promises of tariffs only go a little way and actually offsetting the cost of the tax cuts. So if you take everything that Trump has promised, we estimate a 10% Total budgetary impact of a deficit increase of nearly 4 Trillion dollars over the 10 year budget window. But then when we look at the economics of this, if we factor in the tariffs, the foreign retaliation from foreign governments who are very likely to impose tariffs of their own on U. S. exports in response to the tariffs that we put on imports from foreign countries, the negative impact of that threatens to offset all the economic benefit of the tax cuts. Now, we hadn't modeled the overtime tax exemption yet, but as I mentioned earlier, While it is a big tax cut, it's a big tax cut because it invites a lot of gaming. Um, so I wouldn't anticipate those numbers to shift that much from the situation that we have, which is that an all out trade war could offset the economic gains from tax cuts.

Kyle Hulehan: 6:19

So we just showing this chart and its metrics are in GDP. Could you just maybe for our audience briefly explain why GDP is important? It's kind of a, I feel like this people are saying GDP all the time and no one really knows what it means.

Erica York: 6:33

Yeah. GDP stands for gross domestic product. That's a measure of the final value of the goods and services that we produce in the United States in a given year. So this is essentially a measure of how much output we have, how much stuff are we producing, which in turn is how we earn our income. So it's also a measure of wellbeing in the sense of, this is how much income we're earning. And when that number goes up, um, the economy is growing, there are more job opportunities with higher wages, incomes go up. If that number goes down, we're producing less stuff and we have lower incomes. So when we show in our modeling that a trade war could offset the improved incentives from lower taxes, that's a very serious thing that's saying that, hey, we could all be poorer as a result of these policies altogether.

Kyle Hulehan: 7:20

I see. You know, we're trying to keep things very brief here. So to kind of like transition now, we're trying to do a little bit of a compare contrast episode here with, Trump and Kamala Harris. So when we're talking about vice president Kamala Harris, we also modeled her plans and what she's delivered to us. Uh, could you maybe talk about, you know, what her tax policies maybe mean for income distribution and economic growth for us?

Erica York: 7:46

Yeah, so we have estimated that the effect of her proposed tax increases would be to shrink the size of the long run economy by about 2%. Um, that's pretty impressive. Because she primarily relies on some of the most harmful types of taxes to raise revenue for her spending and tax credit plans. Um, whether we're talking about the higher tax rate on corporations, which affects the economy. Business investment, or we're talking about higher tax rates on individual income on capital gains income, raising those marginal tax rates on different types of income comes with a pretty negative trade off in terms of economic growth. And so that's why we We estimate that 2 percent drop in gross domestic product because of those higher marginal tax rates. Now those higher taxes also raise quite a bit of revenue. So if we look at just the tax side of Harris's plans alone with the higher taxes, the tax cuts for certain groups and the tax credits, we find that it actually raises revenue over that 10 year window, about 1. 7 trillion. But then this is where the unknowns come in. Um, we've also seen Harris promise a lot of new spending for her opportunity economy ideas. We have seen her hint at wanting to continue the expiring tax cuts. Um, and we've estimated just putting rough dollar figures on those that if the tax cuts are extended for people making under 400, 000 and that's not offset by higher taxes on other taxpayers elsewhere. And if she just adopts the rough spending proposals that we saw in Biden's budget this year, that eats up all of that higher revenue and puts us into deficit increasing territory. With a deficit of about one and a half trillion dollars over 10 years. So depending on how exactly she feels in those details, we could see, um, a small increase in the deficit or, you know, maybe close to revenue neutral plan, but still that net negative in terms of economic output,

Kyle Hulehan: 9:48

It seems like to me, there's some shortcomings in both of these plans. You know, Trump might be trading like one good thing for one bad thing. And there might be some, some shortcoming in terms of, of economic growth for Kamala Harris, you know, what do these tax plans maybe offer? Is there, you know, a viable path forward for, for some of these plans that they have while also considering national debt and, and government revenue is one of these plans like. Better for the American people than the other.

Erica York: 10:20

I don't think either have offered a compelling vision of. Fiscal responsibility or a better structured tax code. That's simpler that encourages investment and work. Unfortunately, we're choosing from two, what I would say are bad plans. Um, that still leave a lot of questions unanswered. Some of Trump's policies would move in the right direction, like permanence for bonus depreciation and R and D expensing. But then layered on top of that, we have policies that go in the opposite direction of the 2017 tax reform that would riddle the tax base with preferences that would make it much more complex and more unfair, not to mention tariffs, which would invite foreign retaliation and be even more distortionary. And then when we look at Harris, she's relying on some of the most economically harmful types of taxes to raise revenue for her spending and tax credit proposals. So I wouldn't recommend either path. I'd say we all need to go back to the drawing board. Tax policy has to go through Congress. Maybe Congress can shape up these plans a little bit better so that the end result is something that's not quite so deficit increasing and not quite so economically harmful.

Kyle Hulehan: 11:31

And quite honestly, I think Erica and I have talked a lot about this. And even on episodes before these, these video episodes that we're doing here on YouTube, which you can check out. Um, I think before that there was even, you know, a lot of discussion that these ideas weren't serious enough and the American people, I think, deserve a little bit better on these fronts. They deserve a good plan. And unfortunately, that's not. Seemingly what either of them are delivering right now, um, to keep this moving, we need to go on to the audience questions. And we had a really great question from our man, Ahmaud. Um, Ahmaud asks, uh, I keep hearing that some tax cuts are expiring. What does that mean?

Erica York: 12:10

The 2017 Tax Cuts and Jobs Act cut individual income taxes by lowering rates, widening brackets, doubling the child tax credit, increasing the standard deduction, and paying for that in part by placing limitations on itemized deductions. Which simplified the tax system overall, but it only made those changes temporarily. They were scheduled to sunset at the end of 2025, meaning in 2026, the tax system reverts back to what it used to be. So rates go higher, the standard deduction shrinks, the child tax credit halves, and most of those other changes go away too. We've estimated at Tax Foundation, if that expiration is allowed to occur, about 62 percent of taxpayers would see higher taxes in 2026, because that 2017 tax law reduced taxes for taxpayers across the entire income spectrum on average. Not only would taxpayers see higher taxes in 2026, but the system would be a lot more complicated, too. That's because the TCGA, through the higher standard deduction and fewer itemized deductions, actually simplified the tax filing process for taxpayers, allowing them to take that streamlined standard deduction rather than going through the process of itemizing. The TCGA also reduced the bite of the alternative minimum tax, which is a parallel tax system that millions of taxpayers used to have to file under and pay taxes under whichever system was higher, the AMT or the ordinary system. The TCGA significantly increased the exemption amounts for the AMT, meaning millions fewer taxpayers had to deal with that parallel tax system. That would come back in 2026 if the TCGA is allowed to fully expire.

Kyle Hulehan: 13:54

Erica, thank you for sharing your expertise today, and I appreciate you being on the show.

Erica York: 13:58

Thanks, Kyle.

Kyle Hulehan: 13:58

And before we sign off, I just want to let you guys know if you have any burning questions, uh, on taxes and the election, you know, we're going to continue to discuss all of this and continue doing these election insight episodes. So you can email us at podcast at tax foundation. org, or you will find us on Twitter at deduction pod. Thank you for listening.