The direction of “tax reform” hinges on who wins the presidential election. Moreover, the more “radical” proposals can only be passed if the party that takes the White House also controls Congress. Still, there will be change, and those changes will definitely affect the ultra-high-net-worth taxpayer.

At opposite ends of the spectrum, Republican candidate Donald Trump proposes to completely eliminate the estate and gift taxes, while Democratic candidate Hillary Clinton wants to increase the estate tax to 45% (her primary opponent, Bernie Sanders, suggested an increase to 65%). 

Surprisingly, though, there are issues that both parties agree on in principle that we think will make up the bulk of the revenue raised no matter who is elected. There also is no question that tax increases will be limited to the most affluent taxpayers. There is great discomfort on both sides of the political spectrum about what has been dubbed “income inequality;” the fact that the rich have been getting richer while increased wealth has not trickled down to the rest of the population. 

The concept was popularized by Thomas Piketty in “Capital In The 21st Century” and reinforced by numerous subsequent economic analyses. Any effort to rebalance this inequality will manifest itself as higher taxes on investment income and higher estate and gift taxes. This could create an environment where the basic equilibrium changes and investment income is taxed at the same rate as wages. For high-net-worth people, things have been, and could get, even worse: From 1970 to 1981, investment income was taxed at a much higher rate than wages.

The Democrats would like to raise taxes on the top 1% and the Republicans have made a “no tax increase” pledge. So how can both teams claim victory while still raising revenue? Not by raising the actual tax rate, but by redefining taxable income. This would be accomplished by limiting or eliminating all deductions. It would also reduce the power of a focused lobbying campaign, where one industry or asset class could be more affected than another.

President Obama has proposed in every one of his budgets to limit the benefit of deductions to 28% to fix the perceived problem that a dollar of deduction is worth 43.4 cents in tax savings for the top 1% but only 28 cents on the dollar to the average taxpayer. Trump and Clinton have made proposals to limit deductions as well. Clinton’s proposal echoes that of the president. 

Trump would allow deductions solely for home mortgage interest and charitable contributions while cutting the top rate on income to 33%. He would also cut the corporate tax rate on all businesses from 35% to 15%. Under Trump, there would be no other deductions, such as those for state and local taxes. 

Trump seems to be leaning towards accepting the GOP blueprint that hopes to fine-tune the remaining deductions to make them more “effective and efficient at achieving their policy goals.”  That could mean proposing a dollar or percent limit on the deductions that are still allowed so that the benefits of the deductions are more evenly distributed away from the rich.  As an example, if home mortgage interest were left deductible but limited to a maximum of $500,000 in mortgage debt (rather than today’s $1 million), that change would raise $325 billion. 

Clinton will probably continue President Obama’s tax legacy. For many years, the president’s budget has also contained proposals to limit the benefits of GRATS, eliminate 1031 exchanges and tax any gains at death (rather than a step-up in basis).  Candidate Clinton has a few of her own ideas as well, such as a 4% surcharge on those making over $5 million. This is not a 4% increase in taxes; it would actually be a 20% tax increase on long-term gains and dividends (as the top rate would increase from 20% to 24%). Her other idea is to lengthen the amount of time necessary to receive preferential long term gains treatment.

The effort to change the taxation of carried interests has grown stronger. Both candidates promise change; additionally, Prof. Victor Fleischer, the cheerleader for change, has been recently employed by a member of Congress to lead the charge.