Updated: 10/9/24; Original Post: 9/17/24
Our goal is to empower couples to manage money and the home as a team. There are certainly personal finance implications for couples weighing the economic plans of both presidential candidates.
The Wall Street Journal recently released a 7:53 video summarizing the economic plans of both presidential candidates. I was impressed with the video's objective reporting while providing just enough detail to get the gist of each plan's consequences.
With that said, only some remember much from their high school economics class or are regular readers of the Wall Street Journal. The goal of this post is to share the foundational concepts needed to understand what was shared in the video.
While watching the video, you can use the table of concepts below to jump straight to an idea you need clarification on.
Watch the WSJ Video
Table of Contents
What is a Tax Deduction?
A tax deduction reduces the amount of income subject to taxation, thereby decreasing the amount of taxes owed.
When you claim a tax deduction, you subtract the deduction amount from your total income, resulting in a lower taxable income. For example, if you earn $50,000 and have $10,000 in deductions, your taxable income would be reduced to $40,000.
Tax deductions are most valuable for high-income earners; here’s why.
The value of a deduction depends on your marginal tax rate (the rate at which your last dollar of income is taxed). If you are in a 20% tax bracket, a $10,000 deduction saves you $2,000 in taxes ($10,000 x 20%). If you are in the 35% tax bracket, a $10,000 deduction saves you $3,500 in taxes ($10,000 x 35%).
What is a Tax Credit?
A tax credit is money that taxpayers can subtract directly from the taxes they owe to the government. Unlike deductions, which reduce the amount of taxable income, tax credits reduce the tax itself, dollar-for-dollar.
When filing your tax return, some tax credits can lead to a tax refund greater than the amount of taxes you had withheld, which is another example of why tax credits are more valuable than tax deductions. Tax credits are generally more valuable than deductions, particularly for folks earning middle-class and lower-income wages.
What is the Difference Between a Tax Deduction and a Tax Credit?
What is a Tariff?
A tariff is a tax imposed by a government on goods and services imported from other countries. Economists agree that tariffs lead to higher prices for consumers.
Employing tariffs in an economic strategy is a form of protectionism that can be strategic and negotiated with other countries. However, without a thoughtful and strategic approach, they can lead to trade wars and higher prices for Americans.
Why Do Tariffs Raise the Cost of American Goods?
According to economists, tariffs raise the cost of American goods in various ways, both directly and indirectly:
Increased costs of imported materials
Many American manufacturers rely on raw materials and components sourced from other countries. When tariffs are imposed on these imports, the cost of acquiring these materials increases. This increase in production costs is often passed on to consumers in the form of higher prices for the final goods.
Retaliatory tariffs
If the U.S. imposes tariffs on goods from another country, that country may respond with its own tariffs on American products. This can make American goods more expensive in foreign markets, potentially reducing demand and hurting U.S. exporters.
Reduced competition
Tariffs can reduce competition from foreign products. While this might initially seem beneficial for domestic industries, over time it can lead to less pressure to innovate or improve efficiency, which can result in higher prices for consumers. Additionally, with less competition, domestic companies might not feel the need to keep prices low, further contributing to inflation in certain sectors.
Supply chain disruptions
Tariffs can disrupt established supply chains by making importing certain products or materials more costly. This can lead to inefficiencies and increased costs in production processes, which may be reflected in the final price of goods.
Overall, while tariffs are meant to protect domestic industries, they often lead to increased production costs and can result in higher prices for both consumers and businesses.
What is the Tax Cuts and Jobs Act?
The Tax Cuts and Jobs Act (TCJA), enacted in December 2017 and pushed by the Trump Administration, represents the most significant overhaul of the U.S. tax code in several decades. Key components of the TCJA include a reduction in the corporate tax rate from 35% to 21%, the introduction of a 20% deduction for qualified business income from pass-through entities (like S corporations and sole proprietorships), and a shift to a territorial system of taxation for corporations.
For individual taxpayers, the TCJA lowered income tax rates across the board, nearly doubled the standard deduction, and limited deductions for state and local taxes and mortgage interest, while eliminating personal exemptions.
The Tax Policy Center wrote a straightforward post with helpful visuals, such as the visual below, that provides more detail: How did the Tax Cuts and Jobs Act change personal taxes?
The TCJA was designed to stimulate economic growth by reducing the tax burden on businesses and individuals. However, the TCJA also led to debates in three key areas.
Distribution of tax benefits
Patrick Kennedy, Paul Landefeld, and Jacob Mortenson, all of the U.S. Congress’ Joint Committee on Taxation, and Christine Dobridge of the Federal Reserve Board of Governors—released their findings which reveals that almost all of the benefits of the 2017 law’s signature $1.3 trillion C-corporation tax cut went to high-income shareholders and executives—not low- or moderate-income workers.
The four co-authors find that workers below the 90th percentile in their firm’s earnings distribution did not receive any wage boost from the C-corporation tax cut.
Impact on federal deficits
Tax cuts and pandemic relief measures enacted during the Trump administration added $8.4 trillion to the national debt over the 10-year budget window, according to a study released by non-partisan think tank Committee for a Responsible Federal Budget (CRFB). As highlighted in the image below, not all of the debt can be attributed to the TCJA.
Benefits for individuals were not permanent
The provisions affecting individuals and pass-through entities are set to expire after 2025, whereas the corporate tax changes are permanent. For most households, at risk is a tax increase after 2025 unless there is intervention by Congress and support by the President to pass a new bill that either maintains the current federal income tax policy, or modifies it.
What is a Corporate Tax?
A corporate tax, also known as a corporate income tax, is a tax levied by governments on the profits earned by companies and corporations. Corporate taxes are not the same as the tax structure for most small businesses.
What is the difference between a corporate tax and taxes paid by small businesses?
Many small businesses, such as sole proprietorships, partnerships, S corporations, and most LLCs, are subject to pass-through taxation. This means that the business itself is not taxed on its profits. Instead, the profits "pass through" to the owners' personal tax returns and are taxed at their individual income tax rates.
What is the Current Status of Social Security?
According to the Social Security Administration, by 2033, the trust fund paying Social Security benefits will be depleted, at which point the Social Security Administration would be forced to cut recipients' monthly benefits by 17%.
Former President Trump has proposed to stop taxing Social Security benefits, which according to the Committee for a Responsible Federal Budget (CRFB), would eliminate $950 billion in funding for Social Security over the next decade, pushing forward the Social Security insolvency date.
Can You Fix Social Security?
Most proposals to solve the Social Security solvency problem are limited to increasing the recipient age, which barely scratches the surface at solving the problem.
Use this fun interactive created by the Committee for a Responsible Federal Budget to see how you can solve the Social Security solvency problem.
$25,000 Toward a Down Payment for First Time Homebuyers
The Harris proposal is very similar to the Downpayment Toward Equity Act of 2023, which failed to pass, which would have provided grants no greater of $20,000 or 10 percent of the purchase price in the case of a qualified first time homebuyer. The Harris proposal increases the grant amount by up to $25,000.
The research behind the impact of extending such grants is scant, but what does exist can be found in this post by Cameron LaPoint, an Assistant Professor of Finance at Yale University.
“The First-Time Homebuyer Credit, offered in grant amounts between $6,500 and $8,500 between 2008 and 2010, helped first-time buyers become homeowners earlier, at the cost of mild increases in house prices of around 1%.”
This specific proposal has been scrutinized by both sides of the aisle, including progressive publications such as VOX.
New Minimum Income Tax
Vice President Kamala Harris recently reinforced her support for a new tax on the unrealized capital gains of individuals with a net wealth of over $100 million, which President Biden included in the 2025 budget.
To be clear, such a proposal will only directly impact you if you have a net worth of over 100 million dollars. This "billionaire minimum tax" ensures that these wealthy individuals pay a minimum effective tax rate of 25% on their total income.
Below is an illustration of how it would work, according to the conservative-leaning think tank, the Tax Foundation.
Click here to read the full explanation from the Tax Foundation.
How Economists Score the Harris and Trump Economic Proposals
Committee for a Responsible Federal Budget
As originally reported by the Wall Street Journal, Trump’s plan boosts budget deficits by $7.5 trillion, double Harris’s proposal.
"Trump’s combination of tax cuts, tariff increases, military expansion and mass deportations would widen budget deficits by an estimated $7.5 trillion over the next decade, according to the Committee for a Responsible Federal Budget, or CRFB, a nonpartisan group that favors lower deficits.
Meanwhile, Vice President Harris’s plans—social-policy spending, middle-class tax cuts and tax increases on corporations and high-income households—would increase deficits by $3.5 trillion."
Click here to access the report by the Committee for Responsible Federal Budget.
Moody’s Analytics
According to Moody's, Trump's plan would trigger a recession by mid-2025. Over his four-year term, the economy would grow at an average rate of 1.3% versus 2.1% under Harris.
Under a Trump administration, inflation would rise from 3% this year to 3.5% in 2025, compared to 2.4% under Harris.
At the end of Trump's tenure, the U.S. would have 3.1 million fewer jobs than under Harris.
Click here to access the Moody’s Analytics Report.
Goldman Sachs
Goldman Sachs predicted a less dramatic impact from a Trump term. Under Trump and compared to Harris, the economy will grow a half percentage point slower next year, and inflation will tick four-tenths of a percentage point higher.
Wharton School - University of Pennsylvania
Wharton School estimates predict deficits under a Trump administration to be 5x greater than under a Harris administration.
The 2024 Trump Campaign Policy Proposals: Budgetary, Economic and Distributional Effects
“We estimate that the Trump Campaign tax and spending proposals would increase primary deficits by $5.8 trillion over the next 10 years on a conventional basis and by $4.1 trillion on a dynamic basis that includes economic feedback effects. Households across all income groups benefit on a conventional basis.”
Click here to read the report.
The 2024 Harris Campaign Policy Proposals: Budgetary, Economic and Distributional Effects
“We estimate that the Harris Campaign tax and spending proposals would increase primary deficits by $1.2 trillion over the next 10 years on a conventional basis and by $2.0 trillion on a dynamic basis that includes a reduction in economic activity. Lower and middle-income households generally benefit from increased transfers and credits on a conventional basis, while higher-income households are worse off.”
Click here to read the report.
What is Needed to Enact Each Plan?
The authority of a President is limited. In some cases, their plans can be enacted directly with executive action. In most cases, legislative action is needed.
Click here for a handy Comprehensive Policy Comparison Table created by American Century Investments, which lays out the actions needed for each priority of each candidate.
Can You Balance the Budget?
Can you fix the debt and build a responsible federal budget? Give it a try using the interactives below to make tough budget trade-offs choices.
Click here to use the Committee for Responsible Spending Debt Fixer.
Click here to use the Bipartisan Policy Center Balancing Act Simulator.
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