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.
‘Service Providers’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 governor 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.Centerpiece Proposals
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.
Consider the candidates’ proposals to raise the capital gains tax rate, currently 23.8 percent on long-term gains. Sanders would simply tax investment income at the same rates as wage income for people who make more than $250,000 a year. He also wants to raise tax rates for people who earn above that level, setting a top marginal rate of 52 percent for people who make more than $10 million a year. His plans theoretically would more than double the capital gains rate paid by those in the highest tax bracket, said Kenneth Scheve, a political science professor at Stanford University who works on economic inequality issues.Clinton has an interlocking set of proposals that would also raise the rate. First, she supports the Buffett Rule, named for billionaire investor Warren Buffett. It holds that anyone making more than $1 million a year, through investment gains or otherwise, would pay a tax rate of at least 30 percent. Then there’s Clinton’s 4 percent “fair share surcharge,” which would apply to anybody making more than $5 million a year from wages or investments.