I thought I would devote at least one article to the election. Many see 2016 as one of the most critical elections in modern history. Several candidates are proposing radical changes. With that in mind, how will these changes impact your portfolio? More importantly, how do these changes impact dividend growth investors? I went ahead, did some research, and looked at each candidate’s tax plan. For simplification I focused more on the top two candidates in each party. In this post we’re briefly examining the numbers with respect to economics; not a candidate’s character.
Secretary Clinton’s tax plan is very similar to what we have today. However, she is calling for a surtax on individuals with incomes of $5 million or more. She will also keep the Net Investment Income Tax in place at a rate of 3.8%. This 3.8% only applies to those with incomes in excess of $250,000. Essentially, if you’re a higher earner you’re going to be paying more. Fortunately, the majority of America has little to worry about in terms of Clinton tax hikes. Most of us will be paying the same 0-15% on qualified dividend income.
Senator Sanders is proposing radical changes to the tax system. More specifically, taxation on dividends would increase across the board. Also, a new payroll tax of 6.2% would be levied on employers. Third, he would implement three new tax brackets on individuals earning more than $500,000 per year. Sanders justifies these increases by providing universal healthcare and college tuition for public institutions.
Senator Cruz is also proposing radical changes to the tax system. He aims to simplify the system my instituting a 10% flat tax on individuals and a 16% Business Transfer Tax on all business profits, less capital investment. This 10% flat tax on individuals applies to all forms on income, including dividends.
Like Senator Cruz, Businessman Donald Trump aims to reduce the tax burden for individuals and businesses. Trump’s plan involves four brackets on ordinary income ranging from 0-25%. Taxation on dividend income ranges from 0-20%. Trump also plans on cutting the tax rate on corporations from 35% to 15%.
In terms of dividend income, Ted Cruz’s plan is the most favorable if you’re earning $50,000 or more. On the other hand, Donald Trump’s tax plan works better if you make less than $50,000. Bernie’s plan is the least favorable as he plans to tax dividends at ordinary income rates. Hillary’s plan represents little change from what we see today. We addressed tax rates but what about economic impact? How will this affect our total returns? After all another deep recession could throw a wrench in our plans!
Keep in mind I’m bringing in most of my data from the Tax Foundation. Most studies I’ve read have drawn similar conclusions; but the Tax Foundation’s analysis is perhaps the most comprehensive. The full article can be found here: http://taxfoundation.org/blog/comparison-presidential-tax-plans-and-their-economic-effects.
As far as economic growth is concerned the Republican candidates appear to have the most pro-growth strategies. For instance, according to the Tax foundation, Cruz would create the most GDP growth among the four candidates we discussed. His plan would grow U.S. GDP 13.9% in ten years but increase the national debt by $3.6 trillion. On the other hand, Trump’s plan would yield only 11.5% growth over a ten year period. Trump would create 5.3 million jobs in the process; 400,000 more than Cruz. However, despite job growth, Trump’s plan would presumably add over $10 trillion to the national debt.
Clinton’s plan has relatively neutral effects. In contrast, Sanders economics appears to be catastrophic. His plan would shrink GDP by 9.5% in ten years. The plan would also reduce the amount of jobs available by 5.9 million. These numbers are scary to say the least. But keep in mind this is one perspective concerning economic growth in the distant future. History can sometimes be a better teacher. For example, please refer to the model below:
Image by Brian Mitchell, MBA
This model looks at GDP growth during presidential administrations in both parties over the last 50 years. It’s hard to draw any conclusions until we look at the years between 1976 and 1988. Under Jimmy Carter’s far left policies during the late 70s you’ll see GDP take a nosedive. Shortly after, under Reagan conservatism, you’ll see the longest sustained period of economic growth in modern history.
Overall, Cruz economics appears to be the most favorable with Sanders being the least favorable. I say “appear” as I really don’t know and neither does anyone else. Many other factors can impact economic growth. But with respect to Senator Sanders; I highly doubt massive tax hikes and a much bigger government will bode well for the U.S. economy.