Entrepreneurs may be debating which presidential candidate tax plan proposal is best for business, especially given this week's revelations about Donald Trump's leaked tax return, and Hillary Clinton's response.
Here are five ways to compare Trump's versus Clinton’s tax proposals and how they might affect small business; the proposals warrant a full review during these weeks to the final campaign countdown.
1. Corporate tax reduction proposed by Trump
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It’s widely assumed that Trump’s plan would be better for entrepreneurs since his plan reduces business tax rates from a current top rate of 39.6 percent (assuming a Trump administration doesn’t eliminate the investment tax) to a measly 15 percent. Trump also suggests a territorial tax regime for international business.
2. Highest earners tax increases proposed by Clinton
Clinton, on the other hand, plans to raise the rates on the highest earners and further restrict international business. Plus, she plans to raise the time frame for capital gains tax preference rates from one to six years, for maximum benefit.
3. Business tax incentives remain with Clinton
There are many businesses right now that pay little or no tax under the current tax laws. Real estate holding companies, research and development companies, oil and gas developers, agriculture and mining all enjoy major tax incentives under the current tax laws. Presumably, all of these incentives would remain under the Clinton tax plan, as she seems determined to maintain the status quo. On the surface, Trump’s plan is clearly better for business, but the question is whether it will be better for your business.
4. Paying for lower taxes
What would happen, though, under the Trump regime? In order to pay for his proposed lower business and international tax rates, Trump might have to reduce or eliminate many of the incentives many industries now enjoy. For example, Trump has already suggested eliminating the Carried Interest Rule that benefits the private equities and real estate industries. Clinton has also vowed to eliminate this tax benefit.
5. Potential VAT tax
Trump might also have to broaden the tax base in other ways to recover lost income from lower taxes. One way would be to enact a Value Added Tax (VAT) like most European countries. While a VAT should not have a direct tax effect on businesses since the tax is paid by consumers (unless it reduces demand for goods), it will have a major impact on businesses from an administration standpoint. A VAT is a very complex tax that requires extensive recordkeeping and reporting. And the VAT would likely be on top of the corporate and personal income tax, so it would definitely add more complexity to business owners. (The plus side of a VAT is that it would put U.S. companies more on par with the rest of the world where exports would not be subject to the VAT and imports would be subject to the VAT).
Of course, only Congress can make a major change to the tax laws, so anything either candidate wants to do will be subject to negotiation and approvals by both the House and the Senate. Still, it’s worth looking at the potential unintended consequences of lowering the tax rates. It’s never as easy as just comparing proposed tax rates with current tax rates.
Listen carefully to these tax topics during the upcoming presidential candidate debates, and for more information on how to make almost any business expense deductible, check out my book, Tax-Free Wealth.