Election Insights | How to Fix Trump’s and Harris’s Tax Plans

Neither presidential candidate has a perfect tax plan. But what changes could Trump and Harris make to their respective tax plans to better serve American workers and the economy? In this episode, we dissect their plans and provide practical solutions for improvement.

Joining Kyle Hulehan is Erica York, Senior Economist and Research Director. Trump could boost take-home pay by expanding the standard deduction and rethinking tariffs. Meanwhile, Harris could spark wage growth by lowering corporate taxes and broadening investment deductions, all while protecting workers.

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/all/federal/donald-trump-tax-plan-2024/

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

https://taxfoundation.org/blog/kamala-harris-corporate-tax-rate-by-state/

https://taxfoundation.org/blog/trump-mckinley-tariffs-great-depression/

Transcript

Kyle Hulehan: 0:00

Hello and welcome to the deduction, a tax foundation podcast. I'm your host, Kyle Hohenhand. And today we are back with another election episode. We are with our cohost, Erica York, senior economist and research director here at tax foundation. Erica, how are you doing today?

Erica York: 0:16

Doing well, Kyle. Glad to be back for another episode.

Kyle Hulehan: 0:19

Yeah. So you know what we're here for. We're talking the election and taxes, but let me break down real quick. What we're doing for today's episode. Uh, you know, it's been interesting. I've, I've been looking at the comments a little bit and I can see that people can't really decide whether we're pro Trump or pro Harris. And, and it will say, I think we're doing our best to just call balls and strikes here. Not have an agenda. Uh, I would say, I think some of our answers are a little bleak, uh, in our last episode, Erica, you said that both candidates need to go back to the drawing board with their tax and economic plans, And so today what we're hoping to do is provide a ray of hope, a little bit of hope here. We're going to chat about realistic ways to improve these tax plans. For each candidate, keeping it in aligned with their parties and their platform. So maybe just, maybe this will be a little bit more optimistic and a little bit more hopeful So let's just slide right in. So we're going to do what's the news. Erica, we've discussed Trump's tax plans already. People know what we think a little bit, but give us a quick recap. And while you're at it, share with us some practical ideas of how to fix Donald Trump's plan.

Erica York: 1:27

So Trump's plan outlines a whole bunch of different ways to cut taxes. First by making the 2017 tax law that he signed when he was president the first time, um, into a permanent piece of policy rather than letting it expire. And then on top of that, adding a bunch of different other tax cuts, maybe lowering the corporate rate further. He's talked about 20 percent and 15%. He's talked about no taxes on tips, no taxes on overtime income, no taxes on social security income. He's also, most recently, talked about, um, not capping the SALT deduction as part of permanence for that 2017 tax law. In all, it adds up to More than 7 trillion of tax cuts that he's promised. And one of the themes that we're seeing in these recent ideas is targeted tax cuts for different types of workers. And so that's the idea that I went back to the drawing board on and said, all right, we've, we've seen these ideas from Trump of carving out, you know, tip income or overtime income, and just use those as a couple of examples that we And explain why they're not the best tax policy. Um, imagine a waitress who makes 30, 000 and a cashier who makes 30, 000. Under the TIP exemption, the waitress would see a tax cut while the cashier wouldn't. That violates all kinds of principles of tax policy like equity and neutrality and really creates some unfair treatment across workers who should be treated the same. You can imagine a similar sort of situation with the overtime proposal. Imagine someone who earns 45, 000. And that's through working 50 hours a week at one job and someone who also earns 45, 000. But they split their time between two jobs. And so even though they might work 50 hours a week, they don't qualify for overtime pay because they're Working full time at one job and part time at another or something like that. So under the overtime exemption, the first worker would get a big tax cut, while the second worker wouldn't get a tax cut, again, violating these principles of neutrality. So a better way to offer relief to workers, no matter what their type of income is or their working situation, you could do a couple different things. One would be increase the standard You can think of that as like the zero bracket. That's what you get to deduct when you're filling out your tax forms and you don't pay any tax on that amount. The 2017 tax law actually nearly doubled the standard deduction. So increasing that zero bracket by quite a bit, and you could further increase it to further increase the amount of money that people just take home without paying tax on. And it doesn't matter. What type of income you earn or what type of job you have, you can take that standard deduction. Another way to provide relief would just be to lower marginal tax rates. So reducing across the board, the bite that the income tax takes out of your income, um, across different income levels. So both of those would be much more neutral and much more simple to administer than these various, Narrowly targeted tax cuts. And then the final thing I would say, um, and this unfortunately probably isn't quite as realistic is that when you impose a tariff that actually increases the tax burden on labor, it increases prices in the economy, which means with your after tax income, you can actually afford less. When you consider how after taxes, those prices have gone up. So tariffs are themselves a tax on working households. They create a larger tax burden on lower and middle income households that need to do higher income households. So removing the tariffs would also be a better way to make sure that tax relief is targeted to low and middle income workers.

Kyle Hulehan: 5:05

We just can't get away from tariffs, can we? We're, we're always, we're just on this and they aren't good. But we recently released some analysis that shows maybe how bad they are. Trump's tariffs have reached historic levels. Is it, is this right? I

Erica York: 5:20

Yeah, so we did some math and we found that if Trump were really to impose this 20 percent tariff on absolutely everything, bananas, coffee, everything in between, as well as increased tariffs on products that we import from China to 60% That would take the average tariff rate, the average tax rate that we pay on imports seven times higher than it is right now. And you have to go all the way back to 1934 in the midst of the Great Depression and the aftermath of the Holly Smoot tariffs to see a average tariff rate that high. Um, so it really is an unprecedented increase, um, from, from the rate that we have now going up more than seven times to hit that rate during the Great Depression.

Kyle Hulehan: 6:06

mean, I think everyone feels like things are expensive right now. And, and I don't think that this would help at all. And honestly, you know, we're going to switch gears here. And we're going to, we're going to move on to Harris though. And could you just. Quickly, same thing again, recap the tax plan issues and realistic changes to improve it.

Erica York: 6:25

Harris's tax policies are primarily higher taxes on businesses and high income or high net wealth households. Some of those ideas include raising the corporate income tax rate from 21 percent to 28%, raising the tax rate on long term capital gains up to 28 percent for high earners. Um, raising the top marginal income tax rate up to 39. 6 percent and then, um, raising a bunch of other different types of taxes and then using that higher tax revenue to increase targeted tax credits, whether it's the child tax credit, premium tax credits, the earned income tax credit, home buying tax credits, home building tax credits, or the most recently announced, um, America forward tax credits. Which are targeted, probably investment tax credits. We don't know exactly yet or production tax credits for certain types of industries like biotech, other types of advanced manufacturing. So one of the things we've heard Harris talk about recently is that through these targeted investment tax credits, she is wanting to drive broad based economic growth. And so that's the theme that I'm going to go back to the drawing board on. And it doesn't take, um, it's pretty easy to see that higher taxes on all types of business income combined with targeted tax credits for very small businesses. Specific types of technology doesn't really create a business environment that's conducive to broad growth. It's actually less favorable to growth and investment overall, unless you're in one of the lucky industries that qualifies for a new subsidy. Um, and so one way to improve this tax plan, um, honing in on this idea of increasing investment across the board and increasing growth across the board would be to say, instead of targeting All industries with higher taxes and then narrow industries with tax credits reverse that. And instead of relying on really narrow policies, look at a policy like full expensing, which allows deductions for capital investment across industries. It doesn't matter what type of technology you're investing in, what type of industry you're in. Um, if it's machinery or equipment or research and development, you deduct that cost immediately, and that lowers the cost of capital and encourages new investment. And I think we see Harris kind of understand this theme. One of the policies she has proposed is to increase the deduction for startup expenses. Right now, that's limited to 5, 000, and she's proposed increasing it to 50, 000, showing that she understands the benefit of allowing Businesses to deduct their real expenses. This would just continue it to all types of business investment. And so I think that's one way that you could see an improvement, um, and help move that tax plan in the right direction, but still, some of the big things that she relies on are, you know, The corporate tax increase higher tax rates elsewhere, and those increasing the tax burden at the margin, um, discourage that marginal activity. So still a lot of room for improvement.

Kyle Hulehan: 9:36

So real quick, just to hone in on this real quick, with these R& D credits, just to make this clear for our listeners, with these credits, what would happen is, you know, some people will get them. So some industries might grow a lot, But it's not that broad base that you're going to get. It's not going to be a widespread growth for all industries. It's just some people are going to benefit.

Erica York: 9:55

Yeah, that's exactly right. So for example, the higher corporate tax rate we project would raise about a trillion dollars in revenue. And the Harris campaign has said that these tax credits would cost about 100 billion. So a fraction of the higher tax revenue on the corporate rate Would go into these tax credits and these tax credits wouldn't be broadly available. They would only be available for this really specific qualifying activity. So you might be able to incentivize more of that qualifying activity, but at the same time, you're discouraging activity everywhere else. So that doesn't result in broad based growth. That actually results in less growth overall, but within some of these sub industries where you're doing billions of dollars of subsidies, they may still be able to grow profitably. Even in spite of the higher rate elsewhere.

Kyle Hulehan: 10:46

And so you just talked about the corporate income tax rates. We put out some analysis saying that, uh, her plan would hurt workers wages and maybe the U S wouldn't be as competitive. Could you just break that down for us real quick? I

Erica York: 10:58

portion of the corporate tax is borne by workers. And the way that happens is that the corporate tax reduces investment. And when investment goes down, workers are less productive. They have less machinery and equipment to work with, um, fewer factories, less technology improvement. And so worker productivity falls or isn't as high as it would be otherwise. And in the long run, what drives wage increases is productivity increases. So when you discourage productivity, you discourage wage growth. And a ton of studies have been done on this, finding different range of estimates for how much of the corporate burden is borne by workers ranges from 25 percent to 60 percent or 70%. Um, in our modeling at tax foundation, we use a 50, 50 split. So right, right in the middle, half of the burden is. Born by workers in the form of lower wages, half of the burden is born by shareholders in the form of lower returns. And of course, shareholders themselves aren't just the wealthy. Um, if you've got a pension or a 401k, you're also invested in the stock market. So the corporate rate can affect you that way. we use some data from the alliance for competitive taxation that took that range of estimates for how much of the share of the corporate burden workers bear. bear and looking at what would happen under 28 percent rate, their analysis found that workers wages would be lower on average by anywhere from 250 to about 600 annually. And that can vary by state that can vary by congressional district. Based upon, you know, different factors. Um, so we, we took their data and we put it to a map and you can see that on our website. Um, and we've got, we've got it in table form too. So you can see what that estimate looks like. And what we find is that across All of the states and all of the districts, um, average wages would be lower under a higher corporate tax rate. And that suggests another area for Harris to go back to the drawing board on and find a way to raise revenue. That doesn't fall so hard on workers. That doesn't reduce competitiveness and reduce investment because that's a trade off Probably not worth the higher revenue. There are much better ways to raise revenue that won't directly lower worker wages in this way.

Kyle Hulehan: 13:13

think I promised that we were going to be more optimistic in this episode. And so I'm going to say, we did provide you plans of how this could be better. Some realistic ways of things that they could do to make this a little bit better, to improve plans and to help you guys, um, we're going to, we're going to jump over to these questions, but I couldn't help, but say that it ended a little bleakly still, even though I promised optimism, but we're going to head over to some, to some listener questions. Um, so. We have a question from Jason. Do either candidates include details of how they will reduce government spending? If so, which can, which candidates tax proposals would work best?

Erica York: 13:53

So the answer is no. Um, partly because the candidates probably would increase spending. So we know for sure that Harris wants to increase spending in certain areas. Um, she's calling it this opportunity economy idea. Ideas for education, for healthcare, for housing, for, um, childcare, where government spending would go up. We don't have a precise. Numbers on that. Um, and you know, different estimating groups in, in the think tank space have tried to put a range out there. Um, we've tried to put a range to this too, looking at what proposals were included in the white house. Budget this year. and it really varies. It varies from, you know, a trillion dollars to quite a bit more than a trillion dollars in increased spending. Um, and what we've found is that with the tax increases that Harris has proposed, those alone would increase revenue by about 4 trillion over the 10 year budget window. She uses up quite a bit of that with the tax credits that she has proposed. So. You get to a trillion and a half revenue left over after that, and that goes pretty quickly. If you look at the education, the child care, the health care, the housing initiatives, those could very quickly use up all of that revenue and you'd be into deficit increasing territory. Now with, um, with Trump, we haven't seen very many details at all on the spending side. Um, you know, there are these, these vague ideas to find efficiencies to reduce waste, fraud, and abuse. That's really a drop in the bucket of the federal budget. Um, if you, if you want to reduce government spending, you really have to talk about major reforms. Um, not just efficiencies here and there. Efficiencies are important, but they don't balance the budget. And when we look at the tax side, Trump is proposing way more tax cuts than he is proposing offsets to that. Even with the higher tariffs, we find that just on the tax side alone, the budget deficit could increase by close to 4 trillion over 10 years, and we haven't seen Anything close to 4 trillion in spending savings outlined by the Trump campaign. So unfortunately, um, both candidates when it comes to budget math are probably going to increase the deficit Harris by a little bit Trump by potentially a lot.

Kyle Hulehan: 16:17

we'll go on to our next question. And this is, uh, I believe it's going to be pronounced just stain. Uh, Why are we even entertaining some of these concepts that Donald Trump is putting out if he has no intention of implementing them once he gets his presidency? Does anyone think he's legitimately going to do these ideas? And so I pulled this one out because I believe this question highlights a crucial issue, which is, can we separate? Rhetoric and unrealistic campaign promises from the candidates actual plans and how can we have confidence in their proposals when they may not be offering realistic solutions? So Eric, I'm just going to let you run with this.

Erica York: 16:55

Yeah. I, I got a question similar to this from a reporter a couple of weeks ago, and it was essentially along the lines of like, Are we just in a policy by a soundbite season? And I think the answer is yes, but just because, you know, these are coming out as soundbites and comments here and there, rather than a fully fleshed out policy proposal, doesn't mean that we should just shrug them off. Um, if all we're getting is soundbites, that's what we're getting. That's what we have to go on, um, that lets us know the direction that the candidates want to go. And so whether it's the idea that like, Hey, I don't think Trump is going to pursue these tariffs. I think that he keeps bringing tariffs up as the solution for any question that's asked, whether it's about the budget, whether it's about childcare, whether it's about, you know, actual trade related questions, whether it's about manufacturing in America, that the answer is tariffs tells us he's probably pretty serious about the idea of tariffs and we should take that. Policy proposal. Seriously. We could also look at Trump's time in office when he did impose tariffs. Um, any, any chance that he could when, um, like a U. S. T. R. investigation had tariffs as a possible policy that he could implement. He chose to implement that. So So I think it's very clear that he's in favor of tariffs. If we look at the tax ideas, um, you know, the, the idea of no tax on tips got brought up this summer. Now there are five bills in Congress that propose different ways of getting rid of taxes and tips. So again, I think that's a really serious indication that, Hey, lawmakers in Congress are going to run with these ideas and if Trump is, you know, Reelected there, there's possible, um, possible scenarios where legislation has already been introduced and that gets worked into whatever type of tax bill gets worked on next year. Um, so just because the ideas seem unrealistic or unworkable, I don't think that means that we get to write them off as. They're not going to happen. We don't have to take them seriously. I think it's an idea or an indication that we need to take them even more seriously. Um, if, if these are the ideas we're getting on tax policy, that shows the direction that tax policy would likely go.

Kyle Hulehan: 19:14

And I think quite honestly that this goes for both candidates when I say this is We've been very clear is like, we're not getting enough details. We're not getting enough, you know, uh, plans from them to really know what's going to happen. This doesn't even just apply to Trump is that we're not, we're not getting realistic solutions and realistic options from either one of them. And it's, it's just not enough. And I think you've laid that out for us so clearly today, Erica. And I just want to thank you for being on the show. Uh, this is really tremendous stuff. I

Erica York: 19:42

Thanks.

Kyle Hulehan: 19:43

And that's been another episode of the deduction before we sign off. If you have any burning questions, you can email us at podcast at tax foundation. org, or you can find us on Twitter at deduction pod. Thank you for listening.