With Super Tuesday behind us, the presidential campaign primaries are in full swing. The narrowing of the field of Democratic candidates provides us an opportunity to consider the impact of their respective tax plans, particularly in comparison to the provisions in place today.
We have already covered a deeper dive of the Democratic front-runners’ tax plans in earlier parts of this publication series, and established that any of these tax plans would face substantial challenges before they would pass into law.
Challenges or not, the most prepared taxpayer may want to understand how the broad strokes from the current tax law, former vice president Joe Biden, Massachusetts Sen. Elizabeth Warren, Vermont Sen. Bernie Sanders, and former New York City mayor Michael Bloomberg would translate to his or her bottom line. Below is a side-by-side comparison of each tax plan, which may help crystallize the differences between each plan for individuals with higher income.
Some Assumptions for the Comparison
This analysis will involve a hypothetical single individual, Alexandria Jones with a taxable income of $1 million. This taxable income consists of $700,000 in wage income, $150,000 of qualified dividends, and $150,000 of capital gain on the sale of unimproved land held for investment.
For purposes of this analysis, proposed wealth taxes are not included. Also, the income tax liabilities were calculated using 2019 rates and brackets with two exceptions. The first exception is that the highest marginal rate was adjusted to match the candidate’s proposed maximum rate, and the second is that the calculation for Sanders was performed using a website built by a third party unaffiliated with the Sanders campaign. And where payroll taxes are concerned, note that only the employee share of payroll taxes is presented.
Tax Liability under Current Law
Alexandria would pay a total of $318,277.30 in taxes under current law. Her taxable income level places her in the highest tax bracket, meaning that all of her wage income over $510,300 would be subject to the maximum 37% tax rate. For payroll tax purposes, the first $132,900 of her wages would be subject to Social Security taxes and all of her wages would be subject to the 1.45% Medicare tax. She would also be subject to the 0.9% additional Medicare surtax on her wage income in excess of $200,000. The qualified dividends and gain from the sale of the land would be taxed at the 20% capital gains rate, but would also be subject to the 3.8% Net Investment Income Tax (NIIT).
Effect of the Candidates’ Plans
Each of the proposed plans would increase Alexandria’s tax bill, with Sanders’ plan carrying the greatest increase and Bloomberg’s plan providing the smallest increase. The following table depicts Alexandria’s overall tax liability under each plan.
The increases from Sanders’ tax plan come from multiple components of his proposals. Under Sanders’ plan, there are additional tax brackets added for high-income earners. Alexandria’s $1 million income would not place her into Sanders’ highest proposed bracket. Instead, she would fall into the third highest bracket, with her income above $500,000 being taxed at 45%. Sanders’ two highest brackets, 50% and 53%, kick in at $2 million and $10 million, respectively. His plan also has an additional 4% Medicare-for-All premium, which is imposed on all taxable income.
But the total tax burden only tells part of the story. Each of the Democratic presidential candidates has proposed changes to the way capital gains are taxed. And all of the candidates, save Bloomberg, have proposed changes to the payroll tax system. These changes will affect individuals differently depending on the source of their income.
For taxpayers without capital gains, the income tax increases are rather moderate by comparison. The following table depicts the income tax on Alexandria’s wage income alone.
For many individuals, even those on the higher side of the income scale, this means that the effect of any income tax increases may be relatively small. But for those with capital gains or even higher wage incomes, the impact under the candidates’ tax plans becomes more stark.
Under each of the candidate’s proposals, capital gains and dividends would be taxed as ordinary income if income rises above certain thresholds. These thresholds range from $1 million for Biden’s and Bloomberg’s plans to about $515,000 (the top 1% of taxpayers by AGI) for all of the other candidates aside from Sanders. The Vermont senator would utilize a 45% capital gains rate if income rises above a threshold amount. Because each of the candidates, other than Sanders, would raise the top ordinary income tax rate to the pre-TCJA rate of 39.6%, the results are pretty similar. The following chart depicts these capital gains tax results (which also include NIIT that would not change under the candidates’ tax plans).
Sanders’ and Warren’s results are distinguishable from those under other proposals. As mentioned previously, Sanders proposes higher tax brackets, which drives his higher tax on capital gains. Warren proposes the same 39.6% rate as the other candidates and a 1% threshold for taxing capital gains as ordinary income. But Warren also proposes to subject capital gains to an additional 14.8% Social Security tax if total net investment income exceeds $250,000 ($400,000 for a married couple filing jointly). This is in addition to the 3.8% NIIT that all of the candidates would retain.
On the payroll tax side, the only candidate who would make no changes is Bloomberg. The others would increase payroll taxes in different ways and by different amounts. The following chart depicts the payroll tax results under each of the candidates’ tax plans.
Payroll taxes are the only area where Sanders does not propose the largest tax increase of the other Democratic presidential candidates, at least when considering only the employee share of these taxes. Warren proposes a higher rate for Social Security taxes on wages above $450,000, 7.4% versus Sanders’ 3.2%. However, Sanders also proposes a new 7.5% income-based premium that employers must pay. It is unclear at this time whether this new tax, if imposed, would be passed on to employees in the form of wage cuts or decreased future raises.
Each of the remaining Democratic candidates, have varying approaches that would result in a tax increase for wealthy individuals. The tax increases covered in the article only cover some of the proposed increases in the plans. For example, Bloomberg has proposed an additional 5% tax on certain high-income taxpayers, while Sanders and Warren have proposed wealth taxes that would represent even more tax increases on the wealthy.
But raising taxes is only part of the story. Each candidate has proposed his or her tax increases in order to finance proposed additional spending on items including healthcare, infrastructure, education, and tax benefits for low and middle-income earners, such as increases to the child tax credit and an expansion of the Earned Income Credit. These enhancements to the disposable income of many Americans may offset the cost of these additional taxes. This dynamic would vary for each individual, and may benefit some while negatively impacting others. In any case, the comparative results for a hypothetical taxpayer under each tax plan help to demonstrate the differences among the varying plans.
If you have any questions about these tax plans, please contact us.
Explore Our 2020 Campaign and Taxes Series
Published on March 03, 2020