By William Stromsem, J.D., CPA
Assistant Professor of Accounting, George Washington University
In an effort to appeal to voters, some of the Democratic primary candidates have proposed major tax law changes. It is always interesting to see how far primary candidates will go in either party to appeal to those who have more extreme views in their party to capture the nomination and then to see how they try to move back to the middle for the general election when they have to appeal to a more moderate majority across party lines. General election candidates like to cite extreme views espoused in the primaries to show that the other candidate is out of touch with the people.
Here are some of the positions recently announced by Democratic primary candidates:
Income Tax Rates—Joe Biden and Amy Klobuchar have proposed raising the top rate to 39.6% from 37%. This is the rate that applied before the Tax Cuts and Jobs Act of 2017. Bernie Sanders proposes a top rate of 70% for income over $10 million.
“Wealth” Tax—Sanders and Elizabeth Warren have proposed a tax on net worth for high-wealth individuals. For those with over $50 million in assets, Warren would assess tax at a rate that would be 2% of net assets and the rate would rise to 3% for those with net worth in excess of $1 billion. Sanders would have a progressive rate starting at 1% on wealth over $32 million and rising to 8% on wealth over $10 billion. These would be annual taxes and could eliminate "excess" wealth over a period of decades if there is no offsetting appreciation. Some believe that this government taking of property would violate the U.S. Constitution.
Estate Tax—TCJA exempts $11.4 million singles; $22.8 million married couples. Sanders would lower the exemption to $3.5 million and raise rates to 45-55% based on estate size, with a high tax on billionaires of $77%. Warren, Cory Booker and Pete Buttigieg would lower the exemption to $3.5 million and set a top rate of 45%.
The proposals above could subject wealthy taxpayers to three levels of tax on the same income: (1) higher income tax rates as it is earned, (2) a new wealth tax once it is accumulated, and (3) a higher tax on distributions when they dispose of their wealth.
Payroll Taxes—Julián Castro would tax income from inherited wealth of $2 million or more and would include this income in assessing payroll taxes as if it were compensation.
Social Security Wage Cap—Klobuchar and Sanders would raise the cap from $132,900 to $250,000, and Beto O’Rourke would raise it to $400,000. Note that this is for payment of the tax, not for computing the benefits that would continue at the old cap.
Capital Gains—Biden would double the capital gains maximum rate to 40%. Castro and Klobuchar would increase the rate for those earning more than $400,000 a year. Most favor taxing capital gains as ordinary income and eliminating the preferential rate for taxing capital gains.