Good morning Hank, it's Tuesday. So in Sunday's US presidential debate, a voter asked:

"What specific tax provisions will you change to ensure the wealthiest Americans pay their fair share in taxes?"

The candidates' answers were interesting, but limited, so today I thought I'd take a look at Hillary Clinton and Donald Trump's tax plans. But to do that we need to understand the current US tax system which unfortunately is not uncomplicated.

So let's imagine three married couples with two children apiece: The Johnsons make the median US household income of $52,000 per year. The Kennedys make $300,000 per year, and the Roosevelts make $1,000,000 a year.

Definition time: So your top marginal tax rate is the tax rate you pay on your last dollar of income. For the Kennedys that's 33%. But that's not actually the percentage of their income that goes to federal income taxes because no matter how much money you make your first $18,450 of income is taxed at 10%. The next 56-ish thousand dollars is taxed at 15% and so on. In the end, the Kennedys pay about $66,424 in federal income taxes under the current system. That's 22% of their income, that's their effective tax rate.

The Roosevelts with their million dollars of income pay about $336,500 in federal taxes, an effective tax rate of 33.6%. Or .7 if you wanna round up but God knows it can't be that simple because usually families like the Kennedys and the Roosevelts pay less in taxes due to deductions.

The US tax code allows you to deduct certain expenses from your income, like charitable donations, some retirement savings, and mortgage interest. And you can either itemize your deductions by listing them or take the so-called "standard deduction" which is available to all taxpayers. For married couples filing jointly, it's currently $12,600.

Okay, I know this is a little complicated but stay with me. Lastly we have the Johnsons. With their income of $52,000 a year, the Johnsons can expect to pay $553 in federal income tax, an effective tax rate of just over 1%. Wait, what?

Right, so first the Johnsons take the standard deduction of $12,400 [actually $12,600], which brings their taxable income down to $39,600 [actually $39,400]. Then you also take a $4050 personal exemption for yourself, your spouse, and your two kids. That's $16,200, which brings the family's taxable income down to $23,200. They would pay about $2553 of taxes on that income except for child tax credits. There is a $1000 tax credit for each dependent child you have, so that's how the Johnsons get down to $553.

And I think this is really important to understand. Because it underscores that for the half of American families making less than $52,000 a year, federal income taxes are quite low. In fact, a large majority of those households pay no federal income tax at all. They do pay lots of other taxes though, like payroll taxes which neither candidate is proposing to change; and sales and property taxes, which are local and therefore not under the purview of the president. But it's really critical to remember that federal income tax policy can only do so much.

Okay, so we're gonna look at both these proposals mostly using analyses from the Tax Foundation which for the record is non-partisan but usually considered conservative-leaning. Let's start with Hillary Clinton's tax plan which she described like this:

Clinton: "Nobody who makes less than $250,000 a year, and that's the vast majority of Americans as you know, will have their taxes raised because I think we've gotta go where the money is."

John: And that's accurate. Clinton's plan mostly leaves the tax code unchanged with four main differences. First, income over five million dollars per year, which is currently taxed at 39.6%, would be taxed at 43.6%. There's a lower tax rate on capital gains which is like sale of appreciated stock or of a business, and on capital gains over five million dollars Clinton's tax plan would also increase that rate 4% from 20 to 24%. 

Secondly, households with over a million dollars in income would have to pay at least a 30% effective tax rate. So basically they couldn't use deductions to get under a 30% tax rate. Third, carried interest would be taxed like regular income. This is a little bit complicated, but basically carried interest allows many investment bankers to claim most of their income as capital gains rather than as ordinary income which means they pay a lower tax rate. This would close that so-called loophole.

And lastly, Clinton's plan would double the child tax credit and also introduce a new $1,200 tax credit for caregivers. So if you're taking care of an elderly or disabled family member that credit would be available to you. There would also be some changes to the estate tax and some corporate taxes would change in an attempt to keep U.S. companies from shielding their income from U.S. taxes.

So under the Clinton tax proposal, neither the Kennedys nor the Roosevelts would see their taxes changed unless the Roosevelts are claiming hundred of thousands of dollars in deductions, in which case their taxes might go up slightly. The Johnsons however would see their federal income taxes go from $553 a year to zero because of the increase in the child tax credit. So just to be clear, at the debate when Donald Trump said: "She is raising everybody's taxes massively," that's just not true for the vast majority of Americans.

But there is a cost to tax increase even if they're only focused on the rich. They discourage investment and business spending, like the Tax Foundation says the Clinton plan would reduce overall U.S. economic output by 1% over the long term. Other projections have it much lower, but regardless it would have some effect. It would also of course create new government revenue which would be used to pay for subsidized college, infrastructure projects, and paid family leave. Most non-partisan analyses conclude that after accounting for all of this, the Clinton tax and budget proposals would add about 200 billion dollars to the U.S. debt over the next 10 years. 

Okay let's talk about Donald Trump's new tax plan which is quite different from the one he released in June and which I talked about here. At the debate he said: 

We're cutting taxes for the middle class, and I will tell you, we are cutting a big league for the middle class.

So Trump's plan features three marginal tax brackets for married couples filing jointly income up to $75,000 a year would be taxed at 12%. From there up to $225,000 would be taxed at 25% and above $225,000 would be taxed at 33%. He would also cap deductibles for married couples at $200,000 a year. He would make child care expenses deductible up to the average cost of child care in your state. Increase the standard deduction from $12,600 per year for married couples filing jointly to $30,000 a year, and he would get rid of personal exemptions. 

As you'll recall, those personal exemptions allow you to take $4,050 off your income for each member of your family. Eliminating them, even with the increase in the standard deduction, would mean that for many families with single parents or with more than three children making between about $60-100,000 a year, taxes would actually go up somewhat under Trump's plan. This would be the case for about 7.8 million households.

But for the rest of us, our federal income taxes would stay about the same or go down under Trump's plan. Like if we look at our three hypothetical families, the Johnsons would see the federal income taxes go from $553 a year to $400. The Kennedys, making $300,000 a year would pay about $46,350 in taxes, a reduction of about $20,000 from the current system, and the Roosevelts would pay about $287,250.

As you can see, the tax cuts are heavily concentrated on the wealthiest individuals who pay the most income tax Trump's plan would also decrease the corporate tax rate from 35% to 15% and like Clinton's plan it would seek to get back some of the profits that are offshore from U.S companies, and it would close the carried interest loophole. In total, before accounting for macroeconomic effects Trump's plan would lower revenue somewhere between 4.4 and 7.2 trillion dollars over the next 10 years depending on who's doing the math.

But, just as higher taxes can discourage investment, lower taxes can encourage it, and the Tax Foundation does project that Trump's plan would lead to growth. But no matter what you've heard, that does not mean that tax cuts pay for themselves. They don't. For instance, both the Reagan and the Bush tax cuts boosted growth, but they lowered federal revenues. The Tax Foundation, which remember, is conservative leaning, says that even after growth is accounted for, federal revenues will decrease under Trump's plan between 2.6 and 3.9 trillion dollars.

Now Trump has proposed to pay for some of the shortfall, around 1 trillion dollars over 10 years, via budget cuts, but he also wants to spend 500 billion dollars more on the military over the next 10 years, so even the rosiest projections have Trump's total budget and tax plan adding about 2 trillion dollars to the national debt over the next 10 years. That's 10 times greater than under Clinton's plan. And other projections like those made by the Tax Policy Center have that number at 7.2 trillion dollars, 36 times greater than Clinton's plan.

I want to pause for a second to discuss why this could be such a huge problem. So currently the U.S.'s debt held by the public is about 77% of our total annual economic output. That's high, but it's not so high that people are worried about our ability to pay it back. We know that because interest rates on Treasury bills are near 0. It's basically seen as a guarantee that the United Sates will pay its debt, but if our publicly held debt to GDP ratio gets higher, traditionally when it gets to 100% or 110%, that might change.

Lenders might start to get nervous and think maybe the U.S can't pay its debts which would make loans to the United States government riskier which would make them more expensive. Interest rates would go up to pay for the more expensive loans, the government would have to increase taxes or decrease spending, which would inhibit growth, which would lead to lower tax revenues. That would necessitate taking out more loans with higher and higher interest rates, which would leave less money for programs like Social Security and unemployment insurance, which would further inhibit growth, which would lower government revenues and pretty soon Greece.

This is called a debt spiral and it is a catastrophe that once it starts is very difficult to stop. It often takes decades to unwind. Now the chances of a debt spiral in the United States are very low no matter who becomes president, but the Non-Partisan Committee for a Responsible Federal Budget has the 10-year debt from Trump's tax plan rising to 105% of GDP, and that is a very scary level.

Now I want to emphasize that there are serious and thoughtful republican tax and budget plans out there, but to cut taxes by the amount that Trump is proposing, it is necessary to cut either popular entitlement programs like Medicare or else to cut defense spending dramatically. Serious republican budget proposals do one or both, and Trump's does neither.

So in summary Donald Trump's tax plan would cut income taxes for most Americans with the majority of the benefits going to the wealthiest households, and small increases on taxes for some middle class families. Hillary Clinton's tax proposals would cut income taxes for middle class families with children, the rest of us probably wouldn't see much change, but the wealthiest American households would have their taxes go up.

If you'd like much more information there are links to non-partisan analyses in the dooblydoo below I'll also try to be in comments to answer any of your questions. And if you aren't yet registered to vote, or aren't sure if you are registered please go to youtube.com/howtovoteineverystate and find your state. In many states the registration deadline is today so register. Please vote! Hank, DFTBA. I will see you on Friday.