hello and welcome to the deduction a tax Foundation podcast I'm your host Kyle Holan and today we are back with another election episode with my co-host Erica York Senior Economist and research director here at the tax Foundation Erica how are you doing today hey Kyle doing well glad to be back for another episode all right folks let's just Dive Right In we know you're busy and hustling and bustling so the goal with these episodes is to keep things quick and to the point think of this as as the turbocharged Guide to the big issues the election on taxes and we're trying to get it all in in about 10 minutes everything you need to know on taxes for this election cycle so we're just going to kick it off with the what's in the news segment that that we've had from last week um we'll chat about Trump's tax plan briefly and of course we're going to have some listener questions like we mentioned last week but this is the what's in the news segment so right now uh kamla Harris recently announced some new ideas for her tax plans could you walk us through that Erica yeah so in the last week or so while Harris has for the most part endorsed the policies in President Biden's proposed presidential budget she has mentioned two ways that she would revise that the first is pulling back on one of the tax hikes that Biden proposed and that was Biden's proposal to raise the top tax rate on capital gains to be the same as the ordinary income tax rate which he proposes increasing to 39.6% Harris has said instead of going all the way up to 39.6% she she would raise the rate to 28% where it sits today is at 20% she also supports the increase in the net investment income tax which is a tax that hits investment income like capital gains raising that tax to reach 5% so all in the top rate that Harris is proposing on capital gains would be a rate of 33% the other change that we heard Harris announced in the past week or so is a new proposal to increase a deduction that startup firms use to deduct their startup expenses think things like legal fees or Market surveys that people pay for before they actually actively engage in a business right now they can deduct about $5,000 that's reduced dollar for dooll as those expenses exceed $5,000 and if they do exceed that they have to deduct them over 15 years so spreading that out over time Harris's proposal would um increase that deduction to $50,000 so allow more immediate deduction um to be taken upfront which moves in the right direction my colleague Garrett Watson has estimated that this would cost somewhere in the ballpark of20 billion over 10 years though so this is a really small tax cut in the context of four to5 trillion dollar of tax hikes that are primarily targeted at businesses and high income individuals so while it's a good policy It's relatively small in the context of everything else that Harris is considering so we're going to move from from some smaller suggestions some of the smaller innovations that uh you know Harris has to the big plans that Donald Trump has uh what are the main features of Donald Trump's tax plan that we should know about similar to what we said about Harris a couple weeks ago Trump doesn't have one you know campaign tax policy plan but he's got several different ideas that he has tossed out one of those is permanence for the tax cuts and jobs act Provisions that are otherwise expiring after the end of 2025 so that's tax cuts for individuals for Estates and for businesses there are some business Provisions phasing out as well so Trump would make all of that permanent that's about $4 trillion dollar of tax cuts he has also talked about further reductions to the corporate tax rate it now sits at 21% he has talked about lowering it to 20% or to 15% or in the last week he talked about a 15% rate only for companies that produce domestic which would presumably exclude companies that successfully compete overseas with foreign um companies a lot would still need to be determined with the design of something like that he's also promised further tax cuts to specific groups of people by exempting tips from taxes and by exempting Social Security benefits from taxes we've also heard Senator JD Vance float in an interview something that sounded like a universal $5,000 child tax credit but the campaign and Trump himself have not said anything further about that so I think that was more of like a one-off policy idea rather than something that the campaign is actually fully behind and then of course we have the tariffs yeah so we've talked about tariffs a lot we we know what's going on on tariffs we did a whole episode on tariffs and if you want to go check that out it is right there in our feed you will see it right there just a few episodes back but let's let's chat about the Trump tariff initiatives what should we keep in mind with that so Trump has proposed a 10% tax on All Imports and an additional 60% tax on imports from China he's also talked about taking that 10% rate to 20% and potentially imposing a host of other tariffs on various Imports that we get from different countries now the way that he talks about tariffs makes it sound like he would be imposing a tax on China or a tax on the EU requiring those governments to pay money to the US Treasury he also greatly over States how much revenue could be raised by tariffs at one point he floated replacing the entire individual income tax with tariffs which is mathematically impossible he also talks about tariffs as if they would have no effects on people or businesses in the United States and so I think it's good to take each of those in turn and figure out what really goes on when the US imposes tariffs so tariffs will harm businesses and workers and consumers across both countries or economies involved and if we back up for a second and think about why that's because when we trade with other businesses and other countries that creates a net benefit for both countries by specializing in things that we have a comparative advantage in we get gains from trade if you put a tax on trade and reduce trade you get a mirror effect instead of getting gains from trade you lose those gains and so it creates a net cost for both economies involved to clarify some of the points that that Trump usually mentions about tariffs first they are not a tax that's imposed on China or on the EU they are a tax on the person or the firm importing the good into the United States of course that's the legal incidence the economic burden of tariffs could be shared by others in the economy so you could make a theoretical case that the foreign company exporting Goods to the United States could bear some of the Tariff burden if in light of the Tariff and how that changes supply and demand they would be forced to lower their prices in that way they could bear some of the burden but if we look at the 2018 2019 tariffs that Trump imposed we don't find that effect at all instead we find that the full burden of the Tariff passed through to us import prices so it was the people and the firms in the US buying goods from foreign businesses who had to Bear the economic cost of the Tariff now when someone importing Goods in the US bears that cost of the Tariff they too could shift the burden further again depending on factors like supply and demand and how responsive people are a business could pass some of that higher cost along to its consumers so final retail consumers like you and I when we go to the store would pay a higher price or the business might have to eat that higher cost so it reduces their revenue and ultimately affects their workers and another way that consumers can bear the burden of tariffs is if they have to switch to a higher price domestic Alternatives so say in light of the Tariff being applied to the good it's no longer attractive to buy that imported good instead I switch to something that otherwise I wouldn't have purchased or maybe I'm priced out of the market entirely those are also consumer costs associated with tariffs so bottom line tariffs are not a free lunch they are not a magic tool that we can use to make other governments pay Revenue to us they make us poorer and they make us less productive and that inflicts pain upon our trading partners too I think the the big risk to be aware of is that in his pursuit of tariffs Trump could offset potentially the entire benefit of the tax cuts that he's outlined yeah unfortunately the older and older I get the more I realize there is no magic tool there's a trade-off to everything there's pros and cons to everything nothing is quite perfect and I imagine some of the things you just talked about as we kind of switch gears here uh will be mentioned in the upcoming debate the debate is tomorrow we're recording the day before this so what do you think or what do you expect that will come up in the topics and discussions during the debate so maybe I'm in a cynical mood today but I expect we'll hear a lot of things about tax and tariff policy that aren't true I'm sure we'll hear that the 2017 tax cuts were only tax cuts for the wealthy that's not true the 2017 tax law cut income tax rates across the income Spectrum we've found that if that entire law is allowed to expire 62% of taxpayers would see their taxes go up so it affects a broad swath of American taxpayers I also expect we'll hear Trump talk about China paying tariffs the one truth we might hear is that Harris rightfully points out the economic effects of Trump's proposed tariffs in calling them a tax on us consumers a tax increase on middle class households so there might be a bit of Truth ringing out through the debate if that gets brought up but big picture I don't think either candidate is going to seriously outline how they're going to deal with the real trade-offs of tax policy with debt and deficits with the need to incentivize investment in the United States incentivize saving incentivize growth I'm sure we'll hear more of the same platitudes that don't add up to fiscally responsible or progrowth tax plans yeah I think once again we're going to be left wanting a little bit more from our candidates um to switch over now we're going to get to your questions the questions that you guys submitted to us and we're going to have the expert here Erica answered these you don't want me answering these um so the first question is from Quinton candidates for years have said they want to fix the national debt our debt crisis is getting worse yet I've never seen it make a difference in my daily life is it time to stop having the debt be a part of our political debates what do you think of this I think it's actually time for the debt to become more a focus in our political debates and for policy makers to make good on the big talking points that they offer now the reason I think that is because both major trust funds the trust fund for Social Security and for Medicare are facing insolvency within roughly a decade when that happens if Congress does nothing else then benefits will automatically be cut because the trust ones just won't have the money there to keep paying the promised benefits now for years we've heard politicians talk about this but unfortunately Congress has only allowed the fiscal situation to deteriorate even further if we keep up on the track that we're on right now federal debt will rise above our nation's all-time high an all-time high that was set in the aftermath of World War II by 2027 interest on the debt now already exceeds our defense spending this year so I think we're at a point where lawmakers need to match their talk with action that involves some really tough trade-offs and some discussions about how do we reform spending programs how do we reform the tax code and at some point the fiscal situation will be a forcing mechanism requiring action on that the longer we wait the worse that adjust will be so sooner rather than later is better but I think it still needs to be part of the national conversation and our final question here comes from Joyce me and my husband are teachers do we really need to care about the fight over capital gains whatever the heck those taxes are so raising the rate on long-term capital gains and on dividends that tax increase would only directly apply to people who have more than $1 million in income so I understand thinking that it doesn't matter because it doesn't directly affect what I'm going to fill out on my form Tim 40 but I think the bigger picture conversation about how do we raise revenue and what incentives do we want to create within our tax system is absolutely something that we should all have a conversation about of course all taxes that we can impose involve tradeoffs they all create a negative effect on the economy but in particular taxes on investment and taxes on saving exacerbate a bias that we already have in today's tax code that places a higher burden on income that is put away to save to invest to consume later than on income that is consumed right away and when we have a tax system that's biased against saving an investment that means American incomes are lower than they otherwise would be because we don't have enough domestic saving to fulfill all of the investment opportunities that exist in the American economy more returns to those Investments flow to foreigners and as we increase the tax rates on saving and on investment that becomes more true and so all that to say I think it does matter because it does affect the incentives that determine the level of investment and the level of saving in the US economy and that affects all of us even if it doesn't change one of the lines on our form 1040 Erica thank you for being on the show today thanks KY before we sign off I just want to let you know if you have any burning questions on taxes in the election as we discuss all of this in the coming weeks you can find us at deduction pod on Twitter and you can send us questions there or you can email us your questions at podcast taxfoundation org thank you for listening