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Analysis: Clinton, Sanders Would Bypass Congress To Tax The Rich — A Bit

By Lynnley Browning, Bloomberg News (TNS)

NEW YORK — Most of the proposals that Hillary Clinton and Bernie Sanders have pitched for taxing the rich won’t go anywhere if Republicans keep control of the House of Representatives, as expected.

But spokesmen for both of the leading candidates for the Democratic presidential nomination said this week that they could take executive action, bypassing Congress, to go after a shorter list: the carried-interest tax advantage that investment-fund managers receive, corporate inversions that companies use to move their tax addresses offshore and — in Sanders’s case, at least — a few other parts of the tax code that benefit high-income taxpayers.

Their larger plans for individual income taxes include Sanders’s proposal to increase income-tax rates to levels unseen since 1981 and Clinton’s pitch for a 4 percent surcharge on the nation’s 34,000 or so highest-income taxpayers. Those are almost certainly dead on arrival. Without them, neither candidate could raise enough to finance their most expensive programs.

“All of the things Clinton and Sanders are proposing require congressional approval,” said Eric Todor, the co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.

Presidents have more room to sidestep Congress via executive action in corporate and business-related tax matters, Todor said — but “only things that might involve an interpretation of the law as opposed to changing the actual law.” That might include the carried-interest tax advantage, he said. “But it would surely raise questions.”

Carried interest is the portion of profits from investment funds that are paid to investment managers as compensation. Those payments are currently taxed at the preferential capital gains rate, which tops out at 23.8 percent on investments held more than a year. That’s well below the top rate on ordinary income, 39.6 percent.

The congressional Joint Committee on Taxation estimated last fall that taxing such pay at ordinary rates would generate $15.6 billion in revenue over a decade.

Warren Gunnels, a senior policy adviser to Sanders, cited a 1984 tax law that authorized the Treasury Department to designate fund managers as “service providers” instead of clients’ partners, making them subject to having their compensation taxed at the ordinary rates. Victor Fleischer, a tax law professor at the University of San Diego, has written that the 1984 law provides a basis for addressing carried interest through executive orders. A Clinton campaign spokesman, who asked not to be named, said Clinton would also use executive action to end the carried-interest tax treatment.

Both candidates have also said that if Congress won’t take action to restrict inversions — the practice of moving a U.S. company’s tax address offshore by merging with a foreign company — they’d take steps to curb the practice with executive orders. Congressional leaders have said they want to restrict inversions as part of a tax overhaul. President Barack Obama took some initial steps to limit inversions in 2014 through an executive order.

Beyond that, Sanders has identified four other corporate “loopholes in our tax code” that his campaign now says he’d close with executive orders if Congress didn’t act. They include check-the-box elections, which allow multinational corporations to choose how their subsidiaries will be classified for federal income-tax purposes, and have enabled many to defer taxes on billions of dollars in earnings.

In a letter to Obama last year, Sanders urged the president to act on the four items — and on carried interest and inversions — saying that all together, they’ve been estimated to raise more than $100 billion over a decade.

Clinton has described her own plans for targeting certain tax breaks, though her campaign declined to say whether she’d try to use executive orders on them. She wants to limit the ability of the wealthy to build multimillion-dollar, tax- deferred retirement accounts, which she calls “the Romney loophole.” (Former Massachusetts Gov. Mitt Romney, the 2012 Republican nominee, disclosed during the campaign that he had amassed as much as $102 million in an individual retirement account, in which investment gains aren’t taxed but annual contributions are capped at $6,500.)

Though she called this month for “immediately closing” the ability to build such large IRAs, Clinton hasn’t spelled out how. Likewise, Clinton wants to prevent hedge funds from routing investments through Bermuda-based reinsurance companies as a means of reducing income taxes, but hasn’t said how she’d try to accomplish that.

Clinton’s campaign hasn’t broken out the revenue that would result from ending those two tax advantages, but says her tax plans overall — most of which would require congressional approval — would raise $400 billion to $500 billion over a decade. One of her centerpiece proposals — to offer debt relief on student loans, ensure that students can attend public colleges and universities without taking new loans and make community colleges tuition-free — would cost $350 billion over a decade. It would be paid for by “limiting certain tax expenditures for high-income taxpayers,” according to Clinton’s campaign website.

Sanders, meanwhile, is talking about raising trillions. His own tuition-free plan for state colleges and universities would cost $75 billion a year, but his most expensive proposal would create a $1.38 trillion-a-year, single-payer health insurance system that he calls “Medicare for all.”

To fund the health plan, Sanders has said he’d rely in part on a 2.2 percent income tax, which would apply to all taxpayers. Sanders’s campaign says the impact on lower- and middle-income people would be lessened by deductions and exemptions, and further offset because they’d no longer pay private health-insurance premiums.

Clinton has repeatedly said she won’t raise taxes on the middle class — broadly, anybody making less than $250,000 a year. Sanders’s tax proposals, including a payroll tax that would fund his proposed family and medical leave program, would touch the middle class. But they’d also hit well-off taxpayers harder than Clinton’s.

©2016 Bloomberg News. Distributed by Tribune Content Agency, LLC.

Photo: Democratic U.S. presidential candidates Senator Bernie Sanders and former Secretary of State Hillary Clinton talk during a commercial break at the Democratic presidential candidates debate at St. Anselm College in Manchester, New Hampshire December 19, 2015.  REUTERS/Brian Snyder

 

Clinton’s Estate-Tax Plan Doesn’t Address Her Own Tax Planning

By Lynnley Browning, Bloomberg News (TNS)

NEW YORK — Democratic presidential candidate Hillary Clinton’s call this week to increase taxes on the wealthy and close “loopholes” didn’t address the candidate’s own moves to shield at least part of the value of her New York home from the estate tax.

Bloomberg News reported in 2014 that Hillary and Bill Clinton created residence trusts in 2010 and shifted ownership of their Chappaqua, N.Y., house into them in 2011, according to federal financial disclosures and local property records. Such trusts offer tax advantages, in which any increase in the house’s value can be excluded from the Clinton’s taxable estate. The trust could save the couple hundreds of thousands of dollars in future estate taxes, a tax specialist told Bloomberg News in 2014.

The trusts, as well as the “loopholes” she proposed closing in other areas on Tuesday, are legal under current tax rules.

Brian Fallon, a Hillary Clinton spokesman, said, “Their tax rate was over 35 percent in 2013, and she is proposing policies that would raise their taxes further.”

The minimum value of the Clintons’ financial assets is $11 million, according to Hillary Clinton’s most recent campaign disclosure, which requires reporting within broad ranges of value. The couple has earned at least $30 million since January 2014, according to the disclosure. That income places them among the top .01 percent of American taxpayers, based on Internal Revenue Service data. Campaign disclosures show that the Clintons also own life insurance trusts, which can also reduce estate-tax bills.

Under current law, estates worth less than $5.45 million per person, or $10.9 million per married couple, are exempt from the 40 percent estate tax. Clinton on Tuesday proposed making more estates taxable — those worth more than $3.5 million per person or $7 million per couple. She also wants to raise the rate to 45 percent. The increased tax would apply to four out of every 1,000 estates in the country and raise $200 billion over 10 years, according to a Clinton campaign aide who asked not to be named.

On Monday, Clinton proposed creating a 4 percent tax surcharge for people with annual incomes of $5 million or more, a measure that would target just .02 percent of U.S. taxpayers and raise $150 billion over 10 years, the aide said. Clinton also said Tuesday that she wants to close “loopholes” that create tax benefits for hedge-fund managers and the wealthy. Specifically, she wants to make it more difficult to build multi million-dollar individual retirement accounts, and prevent hedge funds from getting tax benefits by investing through Bermuda-based reinsurance companies.

(With assistance from Jennifer Epstein.)

©2016 Bloomberg News. Distributed by Tribune Content Agency, LLC.

Photo: U.S. Democratic presidential candidate Hillary Clinton addresses supporters at the Electric Park Ballroom in Waterloo, Iowa January 11, 2016. REUTERS/Aaron P. Bernstein