This blog provides a glimpse of what the future U.S. economy would potentially look like under current proposals presented by Kamala Harris and Donald Trump. Background information on the issues and key components of the proposals are summarized for prices, individual federal income taxes, capital gains taxes, Social Security taxes, business taxes, tariffs and healthcare. The blog concludes with a discussion of budget deficits and federal debt.
Prices
Background
Since 2021, U.S. economic growth and the labor market have been excellent. The U.S. had the strongest economic (GDP) growth of any G7 country since pre-pandemic levels. The percentage change in GDP for the 4th quarter of 2023 compared to the 4th quarter of 2019: U.S. 8.2%, Canada 4.4%, Italy 4.2%, Eurozone 3.0%, Japan 2.8%, France 1.9%, and Germany 0.1%. The last time monthly job losses occurred was December 2020. Since then, every month saw job gains. U.S. employment hit an all-time high of nearly 159 million employees in August 2024. Employment has increased over 28 million since the COVID low of 130 million in April 2020, and over 6 million compared to the pre-pandemic high of 152.3 million in February 2020. Real wages have increased since February 2023.
Post-pandemic inflation was a significant problem globally and in the United States. Inflation peaked in 2022, with annualized rates as follows: United Kingdom 9.1%, Euro Area 8.4%, U.S. 8.0%, Mexico 7.9%, Canada 6.8%, and Australia 6.6%. Since 2022, inflation has declined significantly in the U.S. and globally. The U.S. annualized rate of inflation was 2.5% in August 2024.
Although inflation has declined in the U.S. and globally, the increase in prices placed a significant burden on consumers. Similar to overall inflation, food inflation was also a global problem. Five-year food inflation for the period March 2019 through February 2024: United Kingdom 35.6%, Euro Area 28.8%, United States 27.2%, and Canada 25.7%. Annualized food inflation has dropped significantly in the U.S. to 0.9% in August 2024 for food at home. However, food inflation hit consumers particularly hard since buying food is not optional.
Since 2020, U.S. housing prices have increased significantly due to supply shortages. The housing market has been tough for consumers, especially for first-time home buyers without housing equity. Between the first quarter of 2020 through the fourth quarter of 2022, the quarterly median sales price for houses sold increased approximately 46%. The percentage increase in prices over those three years nearly matched the percentage increase that occurred over the entire last decade. Between the first quarter of 2010 and the fourth quarter of 2019, the quarterly median sales price increased approximately 47%. In 2024, the housing market remained challenging for home buyers, with elevated interest rates increasing financing costs and a continued supply strain which propelled home prices to record highs. Housing supply declined significantly in early 2020, and rising interest rates contributed to monthly listings being approximately 30-50% lower than pre-COVID levels.
Harris Proposals
- Will attempt to prevent price gouging by corporations, especially on food and basic necessities. Recently corporate profits and profit margins were at record levels, which contributed to increased prices for consumers. A measure of U.S. corporate profit margins tracked by the Federal Reserve was recently at levels not seen since the early1950s, indicating that the increased prices charged by businesses exceeded their increased costs for production and labor. After-tax profits as a share of gross value added for non-financial corporations, a measure of aggregate profit margins, exceeded 15% in both 2021 and 2022, the highest level since the early 1950s. In the fourth quarter of 2023, corporate profits were approximately double what they were in the fourth quarter of 2019.
- Increase the supply of housing to increase availability and lower prices through the expansion of tax credits for homebuilders with a goal of 3 million new housing units, for sale and rental, over the next four years. In addition, expand the low-income housing tax credit, which subsidizes the acquisition, construction, and rehabilitation of affordable rental housing for low- and moderate-income tenants. For first-time homebuyers, make housing more affordable through a $25,000 tax credit over four years.
Trump Proposals
- No specific proposals to lower prices, but general proposal of using significantly increased tariffs to raise revenue to offset personal income taxes.
Individual Federal Income Taxes
Background
The current federal income tax structure is a progressive tax structure. Although there were changes in the tax law due to the Tax Act of 2018, the basic structure remains the same. Your taxable income, your filing status (for example, single, married, married filing separately), and any tax credits determine what you owe in taxes. Your taxable income is determined as follows:
Gross Income
Less: Certain Adjustments
Equals: Adjusted Gross Income
Less: Deductions (itemized or standard deduction)
Equals: Taxable Income
Your taxable income determines your tax liability; however, tax credits reduce your tax liability. For every $1 of tax credit, your tax liability is reduced $1.
Examples of adjustments that reduce taxable income include contributions to a traditional Individual Retirement Account and student loan interest (other items are listed on Form 1040). Everyone gets the “standard deduction” amount unless the amount for allowable itemized deductions is greater. However, fewer taxpayers itemize following the Tax Act of 2018 as itemized deduction amounts were limited and the standard deduction amount basically doubled. For the 2024 tax year, the standard deduction amount is generally $14,600 for individual taxpayers and $29,200 for married filing jointly. Allowable (amounts are limited) itemized deductions include mortgage interest, state taxes, medical expenses. and charitable deductions.
There are progressively higher tax rates that apply to increasingly higher taxable income levels. As your taxable income increases, higher tax rates will apply as you reach a higher income bracket. For simplicity and clarity, the example below will focus on a single taxpayer, but the implications of tax proposals are similar for married taxpayers.
2024 Tax Rates and Tax Brackets (Single Taxpayer)
| 10% | $0 to $11,600 |
| 12% | $11,601 to $47,150 |
| 22% | $47,151 to $100,525 |
| 24% | $100,526 to $191,950 |
| 32% | $191,951 to $243,725 |
| 35% | $243,726 to $609,350 |
| 37% | $609,351 or more |
The rates apply to the taxable income in a given bracket. For example, if you are single, you pay a 10% rate on taxable income up to $11,600. Income over $11,600 is taxed at a 12% rate up to $47,150 in 2024. So, if your taxable income was $45,000, your tax liability is .10($11,600) + .12($45,000 – $11,600) = $5,168. Your tax liability (taxes owed) may be reduced by certain tax credits (such as the Child Tax Credit).
The general nature of individual federal income taxes did not change as a result of the Tax Act of 2018 relative to 2017 – it remains a progressive tax structure. What did change in 2018 were the tax rates, as well as some specific rules relating to taxable income. The tax rates that were in effect in 2017 generally derived from the “Bush Tax Cuts” that were initially implemented in 2003. Under President Obama, the rates remained the same, except for the tax rate that applied to the top tax bracket. In 2017 there were seven tax brackets, starting at 10 percent and reaching 39.6 percent for the highest income bracket. In 2018, the seven tax brackets remained, starting at 10 percent and reaching 37 percent for the highest income bracket. Relative to 2017, the tax rates in each tax bracket were reduced, except for the 10% tax bracket. Tax brackets were modified slightly. The tax rate changes began in 2018 and expire after 2025, unless extended or changed by law.
An analysis of the 2018 tax cuts by the Tax Policy Center found the following: 1) The tax cuts reduced, on average, taxes across all income brackets by an average of 1.8%. However, not everyone would receive a tax cut, with approximately one-third of taxpayers not receiving a benefit. 2) The majority of the tax cuts went to upper income taxpayers, with taxpayers in the top 1 percent of income distribution receiving approximately 50 percent of the total tax cut benefits and income tax cuts as a percentage of after-tax income the largest for high-income households. Only 27 percent of households in the lowest income-quintile received a tax cut.
Harris Proposals
- Supports extending 2018 tax cuts with for single Americans with taxable income less than $400,000 and joint filers with taxable income less than $450,000. Revert top tax rate to 39.6% for single taxpayers with taxable income over $400,000 and joint filers with taxable income over $450,000.
- Increase the child tax credit to $6,000 (from the current $2,000) for children under age 1, $3,600 for children 2-5, and $3,000 for older children.
- Provide a $25,000 tax credit for first-time homebuyers over four years. Provide incentives to homebuilders to increase the supply of homes by 3 million over four years.
- Exempt tips from the income tax.
- Expand the earned income tax credit for filers who do not claim children.
- Supports “Billionaire Minimum Income Tax,” a 25% minimum income tax on households worth more than $100 million.
Trump Proposals
- Supports making the 2018 tax cuts permanent across all tax brackets and tax rates.
- Consider replacing individual income taxes with tariffs.
- Consider lifting Tax Act of 2018 cap on state and local tax deduction.
- Vance has discussed increasing the child tax credit to $5,000.
- Exempt tips and some overtime pay from the income tax.
Long-term Capital Gains Taxes
Background
The long-term capital gains tax applies to profits made on assets (stocks, bonds, real estate) held for more than one year, at rates of 0%, 15% or 20%. The tax rate that applies depends on your taxable income level. Brackets are typically adjusted annually for inflation. Short-term gains(occurs when assets are sold after being held for one year or less) are taxed at ordinary income rates. (The rate that applies to the taxpayer’s top income bracket.)
2024 Long-term Capital Gains Tax Rates and Tax Brackets (Single Taxpayer):
| 0% | $0 to $47,025 |
| 15% | $47,026 to $518,900 |
| 20% | $518,901 or more |
In addition, the capital gains of high-income earners is subject to a net investment income tax of 3.8%, above and beyond the capital gains tax rate.
Harris Proposals
- Increase the top tax rate on long-term capital gains to 28 percent for taxable income above $1 million.
- Increase the net investment income tax to reach 5 percent on income above $400,000.
Trump Proposals
- Currently no new proposal.
Social Security Taxes
Background
Social Security programs are funded through payroll taxes. Employees and their employers each pay 6.2% of earnings for Social Security taxes; an additional 1.45% of earnings are paid for Medicare taxes. In sum, a total of 15.30% of an employee’s earnings are subject to Social Security and Medicare taxes, with employee and employer each paying 7.65% of an employee’s earnings. Payroll taxes for Social Security taxes are subject to a salary limit of $168,600 in 2024. Social Security taxes are not paid on income exceeding the salary limit. Medicare is the country’s basic health insurance program for people age 65 and older, and for many people with disabilities. Medicare payroll withholding is increased by 0.9% to 2.35% for an individual’s wages paid in excess of $200,000 in a calendar year. There is no wage base (salary) limit for Medicare taxes.
Social Security payments became subject to taxation under President Ronald Reagan in the 1980s. According to the Internal Revenue Service, approximately 40 percent of current beneficiaries pay taxes on their benefits. The portion of benefits subject to taxation varies with income level, with relatively higher income beneficiaries subject to benefit taxation. Up to 50 percent of benefits are taxed if income is $25,000 to $34,000 for an individual or $32,000 to $44,000 for a married couple filing jointly. Below those thresholds, Social Security benefits are not taxed. Up to 85 percent of benefits are taxed if income is more than $34,000 (individual) or $44,000 (couple). Income is defined by Social Security as Adjusted Gross Income from your tax return + nontaxable income + ½ of social security benefits.
Income tax revenue collected from Social Security benefits, in addition to payroll taxes, is allocated to the Social Security and Medicare trust funds. Money is added to the trust funds when program revenue exceeds payments to beneficiaries. Social Security’s total cost exceeded its total income in 2021 for the first time since 1982. Money is withdrawn from the trust funds when current payments into Social Security are less than disbursements. Disbursements are expected to continue to exceed program income after 2021. Social Security and Medicare programs both continue to face significant financing issues. The retirement and survivors benefits (OASI) trust fund is expected to remain solvent until 2033, after which the fund’s reserves will become depleted and continuing program income will be sufficient to pay only 79 percent of scheduled benefits.
Harris Proposals
- Increase the Medicare tax to reach 5 percent on income above $400,000.
Trump Proposals
- No federal income tax on Social Security benefits.
Corporate Taxes
Background
One of the most important changes from the 2018 tax bill was the significant reduction in the federal corporate tax rate. The statutory (legal) corporate tax rate was lowered from 35% to 21%. The 35% rate had been in place since 1993; the 21% rate is the lowest since prior to World War II. Unlike the individual tax cuts, the corporate tax cut is permanent (no ending date) unless changed by law.
The statutory tax rate is the legal rate that corporations pay on taxable income. Lowering the statutory rate certainly lowers the taxes paid by a company. The statutory corporate tax rate was lowered from 35% to 21% in 2018, but the effective rate (the tax rate companies actually pay on their taxable income) can be significantly lowered through tax credits and taxable income lowered through deductions. According to a study by the Institute on Taxation and Economic Policy, the effective tax rate for the 379 profitable companies in the Fortune 500 was 11.3% in 2018. A total of 91 of the Fortune 500 companies, including Amazon, IBM, and General Motors, paid no corporate taxes in 2018.
The Inflation Reduction Act implemented a 15% minimum corporate income tax and a 1% tax on stock buybacks on businesses that earn at least $1 billion a year.
Harris
Business Taxes:
- Increase the corporate income tax rate from 21 percent to 28 percent.
- Increase the tax on stock buybacks from 1% to 4%.
- Expand housing tax credits for homebuilders, including tax incentives for home building with goal of 3 million new housing units, for sale and rental, over the next four years. Also expand low-income housing tax credit, which subsidizes the acquisition, construction, and rehabilitation of affordable rental housing for low- and moderate-income tenants.
- Increase the $5,000 deduction for small business startup costs to $50,000.
Trump
- Reduce the corporate tax rate from 21 percent to 20 percent.
- Lower the corporate income tax rate to 15 percent for companies that make their products in the US.
Tariffs
Background
U.S. imports totaled $3.8 trillion in 2023 while exports were $3.1 trillion.
In 2018 and 2019, the Trump administration initiated a wave of tariffs between the U.S. and several countries, with a focus on imports from China. According to the Congressional Budget Office, by January 2020 the United States had imposed tariffs on 16.8 percent of goods imported into the country. Some tariffs applied to imports of specific products from nearly all U.S. trading partners, including tariffs on washing machines, solar panels, and steel and aluminum products. However, some countries were exempted from certain tariffs. Canadian and Mexican imports were granted exemptions from the tariffs on steel and aluminum products. China was the main focus, with tariffs affecting over half of U.S. imports from China, targeting intermediate goods (items used for the production of other goods and services), capital goods (such as computers and other equipment), and some consumer goods (such as apparel). Many of the tariffs placed on China during the Trump administration remained in effect under the Biden Administration.
In response to the tariffs, U.S. trading partners retaliated by imposing their own trade barriers. As of early 2020, retaliatory tariffs had been imposed on 9.3 percent of all goods exported by the United States, which consisted primarily of industrial supplies and materials as well as agricultural products. While tariffs increase revenues for the U.S. government, it is important to note who pays the tariffs. U.S. corporations choosing to import pay the tariff, not any country that exports to the U.S. The tariff acts like a tax on importing corporations, who can then choose to pass the cost to consumers. In effect, the tariff is a tax on businesses and consumers. According to the U.S. Treasury, tariffs have provided only between 1% and 2% in federal government revenue since 2015.
U.S. tariff rates peaked in 2019. The weighted mean applied tariff is the average of effectively applied rates weighted by the product import shares corresponding to each partner country. According to the World Bank, the U.S. mean applied tariff rate increased from 1.59% in 2018 to 13.78% in 2019 before declining to 1.52% in 2020.
U.S. companies focus on maximizing profitability. The tariffs implemented in 2018, particularly for China, caused many companies to turn away from China for sourcing toward other low labor cost countries. Between 2017 and 2023, imports from China declined $78.4 billion, or 15.5%, while imports from other low labor cost countries surged as the increased tariffs caused U.S. companies to resource imports. On a percentage increase basis, Vietnam was the big winner, with U.S. imports from Vietnam increasing 146% since 2017 to $114 billion in 2023. In terms of dollars, imports from Mexico increased the most. Between 2017 and 2023, imports rose $162 billion to $475 billion, a 51% increase since 2017.
One of the objectives of the tariffs initiated in 2018 was bringing manufacturing jobs back to the U.S. Despite the 2018 tariffs on Chinese imports and reductions in corporate taxes that included incentives for business investment, the restoration of U.S. manufacturing jobs generally didn’t materialize. Resourcing of products occurred through switching sourcing from China to another low labor cost country rather than transferring manufacturing to the U.S.
Tariffs are a tax on businesses and consumers. Tariffs are initially paid for by corporations with the probability that the cost will be passed onto consumers. The tariffs implemented in 2018, particularly for China, could at least be partially circumvented by turning away from China and sourcing from another low labor cost country which had little, if any tariffs. A blanket tariff of 10-20% on all imports would take away low-cost sourcing options, as every import would face a tariff. The increased tariffs would increase prices. Recent cost increases for corporations caused by global inflation and supply shortages were generally more than passed through to consumers. According to the U.S. Bureau of Economic Analysis, corporate profit margins hit a 70-year high in 2022 while profits were at record levels.
Harris Proposals
- No new proposals. Retain current tariffs on China for strategic competitiveness.
Trump Proposals
- Impose a universal baseline tariff on all US imports of 10 percent to 20 percent.
- Impose a 60 percent tariff on all US imports from China.
- Consider replacing personal income taxes with increased tariffs.
Healthcare – The Affordable Care Act
Background
The Affordable Care Act (“Obamacare”) was passed in 2010 as a first-step in providing Americans with access to national health care. The objective of the Act was to make buying health coverage easier and more affordable, with insurance companies competing for business through state-based American Health Benefit Exchanges. Through the exchanges, individuals can purchase coverage (during specific time windows) with premium and cost-sharing credits available to individuals/families (based on income); small businesses may also be able to purchase coverage. The number of health insurance firms competing for business varies by state. Insurance plans were required to cover “Essential Health Benefits’, including certain services such as doctors’ services, inpatient or outpatient hospital care, prescription drugs, pregnancy, childbirth, and mental health. A record 21.3 million Americans signed up for 2024 health care coverage through Obamacare.
Although Obamacare had several significant provisions, there were two extremely important provisions that most Americans seemed to be in favor of:
- A major change in health insurance resulting from the Affordable Care Act is that health insurance policies now provide dependent coverage for children up to age 26.
- In addition, health insurance is now available to those with pre-existing conditions. The Act bars insurers from denying coverage to people with pre-existing conditions, or physical or mental illnesses or conditions that existed before coverage began. Insurers also can no longer refuse to pay for otherwise-covered medical care and services due to a pre-existing condition or charge you more because of a pre-existing condition in the family. Prior to Obamacare, pre-existing conditions were typically not covered by insurance. This was an extremely important provision, particularly if you had to change health care insurance due to a job loss or change.
Harris Proposals
- Retain Obamacare.
Trump Proposals
- Repeal Obamacare.
The Federal Budget Deficit and Total Federal Debt
The backdrops for any change in tax policy, tariffs, and government spending are the budget deficit and total federal debt. The federal budget deficit refers to the amount U.S. federal government spending exceeds government income. To finance a budget deficit, the government borrows money from the public through the issuance of U.S. government debt called U.S. Treasury securities. The Total Public (Federal) Debt Outstanding represents the total (principal) amount of Treasury securities outstanding issued by the federal government.
The onset of consistent budget deficits for the U.S. was the decade of the 1980s. Except for a brief period between 1998 and 2001 when the U.S. was enjoying excellent economic growth and the tech boom was in its internet infancy, the United States has had budget deficits since 1980. Major events that played a role in significantly increasing the budget deficit include: 1) the financial crisis of 2008, 2) the tax cuts of 2018, and 3) the COVID crisis of 2020.
Economic downturns caused by the financial crisis and COVID had a double whammy on the budget deficit, evidenced by a significant reduction in tax revenues as economic growth turned negative and fiscal spending increased to stimulate economic recovery. In 2020, due to the impact of the pandemic and the needed fiscal stimulus programs, the U.S. budget deficit hit a record $3.1 trillion, more than twice the level of the $1.4 trillion deficit that occurred in 2009 during the financial crisis. A significant side effect of the 2018 tax cuts was to increase the budget deficit in a period of economic growth. That set the stage for a significant increase in the budget deficit if anything went wrong with the economy – like it did.
Between 2015 and 2019, the budget deficit doubled to over $900 billion. After peaking at $3.1 trillion in 2020 the budget deficit has declined, although the deficit was still nearly $1.7 trillion in 2023.
Increasing deficits have fueled rapid increases in federal debt. Between 1980 and 2010, the debt rose from near $0 to approximately $10 trillion. Since 2010, the debt has approximately tripled to over $32 trillion. Since 2008, two major economic downturns and the 2018 tax cut have led the debt increase.
Democrats and Republicans have both expressed concern over federal deficits and growing federal debt. To address those concerns, Democrats have typically been in favor of a combination of increasing taxes on corporations and wealthy taxpayers to reduce deficits. Republicans have typically been in favor of decreasing government expenditures, including social programs, to reduce deficits. Going forward, whatever approach is taken to reduce deficits and control federal debt will have a significant impact on government programs and taxpayers, including any changes in tax policy, tariffs and/or government spending on social programs.
For further information:
- Info from the Bureau of Labor Statistics:
- From the U.K. House of Commons: GDP – International Comparisons: Key Economic Indicators
- Global Inflation, from rateinflation.com
- From the IRS: 2024 Tax Rates and Brackets
- From NerdWallet: Capital Gains Taxes
- The Tax Foundation: Presidential Candidate Tax Plans
- From The Tax Policy Center: Research on Tax Policy Issues
- From Kiplinger: Harris Tax Plan
- From the Tax Policy Center: Distributional Effects of the 2018 Tax Cut Across Income Groups and States
- From NBC News: Lower Capital Gains Tax and cuts for Food Benefit: What Project 2025 could mean for your wallet in a Trump presidency
- From the IRS: Taxation of Social Security
- From the Social Security Administration: 2024 Summary of Social Security Trustees Report
- Institute on Taxation and Economic Policy on corporate taxation after the 2018 tax bill: Corporate Tax Avoidance
- From the Bureau of Economic Analysis: U.S. Trade in Goods and Services
- From the U.S. Census Bureau: Top Trading Partners
- From CNBC: Harris Housing Proposals
- From CNN: Obamacare Enrollment Record
- From the Congressional Budget Office: How the 2017 Tax Act Has Affected CBO’s GDP and Budget Projections Since January 2017
- From the Brookings Institution: The 2023 Budget Deficit and Future Debt
- From Reuters: How Harris and Trump Spending Plans Affect the Deficit
Kevin Bahr is a professor emeritus of finance and chief analyst of the Center for Business and Economic Insight in the Sentry School of Business and Economics at the University of Wisconsin-Stevens Point.