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Tax Foundation: Clinton Tax Plan Might Slow Growth

Secretary Hillary Clinton’s tax plan could hold back 10-year national gross domestic product (GDP) growth by 2.6 percent from what it otherwise would reach, according to models developed by Tax Foundation, a Washington, D.C.-based research group. The foundation further projects that the Democratic nominee for president’s plan would drag down wages by 2.1 percent, capital stock by 6.9 percent and jobs by 697,000.

Alan Cole, an economist for the foundation, explained that the reductions aren’t based on existing realities, but instead chip away at projected growths. The Congressional Budget Office, for instance, estimates a 19.2 percent growth in real GDP from 2016 to 2025. Clinton’s plan would cut 2.6 percent from that, the foundation is projecting. Similarly, jobs are set to increase by about seven million during the next decade, Clinton’s near-700,000 possible loss would be in relation to that number.

Cole acknowledged that some estimates, such as Moody’s, have the Democratic nominee’s tax plan exceeding baseline levels. One reason might be Moody’s inclusion of immigration components. Immigrants not only occupy jobs, but can create them by increasing the need for goods and services leading to potentially more jobs and a higher GDP. Tax Foundation does not dispute those projections, they just don’t model them, Cole explained.

The foundation has also not factored in other oft-publicized components of the plan such as no tax increases for those making $250,000 or less. Cole said that such components are more policy guideline than provision and are largely consistent with President Barack Obama’s existing practices.

Clinton’s tax plan would have, according to foundation, the following static and dynamic, factoring in other changes to the economy, impacts to after-tax income:

* Top 1 percent: -6.6 percent static, -8.4 percent dynamic;
* Top 10 percent: -2.8 percent static, -4.9 percent dynamic;
* Top 20 percent: – 2.1 percent static, -4.2 percent dynamic;
* 80th to 60th percentile: 0.1 percent static, -2.3 percent dynamic;
* 60th to 40th percentile: 0.2 percent static, – 2.4 percent dynamic;
* 40th to 20th percentile: 0.5 percent static, -1.8 percent dynamic; and,
* Bottom 20 percent: 2.2 percent static, -0.1 percent dynamic.

Clinton’s tax plan notably proposes a “Buffett Rule” that would establish a 30-percent minimum tax on those with adjusted gross income (AGI) of $1 million or more, a 4-percent surcharge on those with AGI more than $5 million, and a 28-percent cap on many itemized deductions, charitable contributions excluded.

The plan, on the business side, would also establish a “financial risk” tax on large banks, quadruple the startup deduction from $5,000 to $20,000, eliminate fossil fuel tax expenditures, and establish business tax credits for profit sharing and apprenticeships, according to the foundation.

Tax Foundation examined Clinton’s tax plan in January, however, several changes have been made since then. Clinton still plans, for instance, to reduce the estate tax exclusion from $5.45 million for individuals or $10.9 million for couples to $3.5 million for individuals and $7 million for couples. Recent proposals would also progressively tax large estates up to 65 percent. Those changes, in addition to more clarity on how the 4-percent surcharge will be administered, has changed foundation projections of the tax plan to include more revenue, but greater drag on the GDP.

A reduction in saving and investment brought on by some of Clinton’s progressive taxes is cited in the report as reason for overall projected economic drag. Cole likened the foundation’s economic projecting to a company owning a pile driver. Tax Foundation endeavors to not only consider the cost of purchasing a pile driver, but the degree to which it depreciates with use, the rate the company is getting for its use, and other factors. Examining the cost of maintaining such assets, Cole explained that Clinton’s tax plan makes it more expensive to own such assets — cutting into production and wages.

Tax Foundation is a non-partisan nonprofit and does not endorse candidates. Even if it did stack up the policies side by side, the tax plans of Clinton and Republican rival Donald Trump are so different with varying strengths and weakness, a comparison would be difficult, Cole said.

Clinton’s tax plan would generate $1.4 trillion in tax revenue over the next decade, or $663 billion accounting for a slightly smaller economy. “There’s no real tax reform,” Cole said of Clinton’s plan. “There’s kind of nibbling around the edges, provisions to add revenue here. There’s no broad-base tax relief.”

Trump’s plan, which the foundation examined last month, would increase GDP by a projected 6.9 to 8.2 percent over baselines and add between 1.8 and 2.2 million jobs. Tax revenues, however, would be slashed by between $4.4 and $5.9 trillion over the next decade, or $2.6 to $3.9 trillion after accounting for a larger economy. Cole said that Trump’s plan could be good for growth if he could find proper places to cut spending. “That doesn’t seem too likely,” he said. “He might not be putting in enough spending cuts to make it feasible.”