Income Inequality

Clinton Wants Higher Estate Tax, Closed Hedge-Fund 'Loopholes'

Hillary Clinton's Tax Plan as Policy and Politics
  • Plan to go after multimillion-dollar IRAs, like Romney's
  • Tax-the-rich proposals echo those from Obama, others

Democratic presidential candidate Hillary Clinton today called for increasing the estate tax and closing tax “loopholes” used by hedge funds and the wealthy, as her campaign touts ways she’d tax the rich.

Clinton wants to reduce the threshold at which estates are subject to tax -- to $3.5 million for individuals or $7 million for married couples, down from $5.45 million and $10.9 million currently, according to a campaign news release. She’d also raise the estate-tax rate to 45 percent, from the current 40 percent. The changes would be a return to the way the tax operated in 2009. President Barack Obama and other Democrats have proposed similar adjustments.

Clinton’s campaign identified two other loopholes she would seek to close as president: one related to a maneuver hedge funds use to route investments through Bermuda reinsurance companies and another that allows for multi million-dollar, tax-advantaged retirement accounts. Both issues have also already been raised by Obama or others. Clinton will “build on” others’ proposals, according to a campaign aide, who asked not to be named.

Clinton also repeated her call for closing the “carried interest loophole” that allows hedge-fund and private equity managers to pay a lower tax rate but didn’t offer a specific proposal.

“My plan is kind of simple: We go after the wealthy to pay for what the middle class, working and poor people need,” Clinton said today at an organizing event in Ames, Iowa. Her campaign said the changes she has announced would raise $500 billion over 10 years.

Clinton’s tax proposals are coming out this week as her main opponent for the Democratic nomination, Senator Bernie Sanders of Vermont, has taken the lead in key early-state polls. Sanders has also called for taxing estates worth more than $3.5 million, but has proposed a progressive series of tax rates, up to 65 percent on billionaires’ estates.

On Monday, Clinton called for a 4 percent “fair share surcharge” on incomes over $5 million. Speaking today, as she accepted the endorsement of the pro-gun control Brady Campaign to Prevent Gun Violence, Clinton said that her record on guns was just one example of her history of taking on special interests.

“I went after carried interest, the hedge fund billionaire special loophole,” she said. “I went after derivatives and swaps. I went after corporate executive compensation. Some of my ideas got into Dodd-Frank even though I was no longer in the Senate.”

Turning her attention to Sanders, she said: “So don’t talk to me about standing up to corporate interests and big powers. I’ve got the scars to show for it and I’m proud of every single one of them.”

Clinton said today she’d close down what her campaign called the “Romney loophole,” a reference to 2012 Republican Presidential nominee Mitt Romney, who disclosed having a tax-advantaged retirement account worth more than $100 million.

The Government Accountability Office found in 2014 that as many as 1,000 wealthy taxpayers had accumulated $10 million or more apiece in such retirement accounts, and Obama has called for limiting the ability to shelter large incomes in the tax-preferred accounts.

In singling out the so-called “Bermuda reinsurance” loophole, Clinton’s campaign is referring to an arrangement used by hedge-fund managers to set up and fund Bermuda-based reinsurance companies, then invest the companies’ assets back into the hedge funds.

Because reinsurance companies, which sell coverage to other insurers, aren’t subject to tax penalties that would attach to other types of offshore investment, the arrangement has the potential to cut in half the tax bill on such investors’ hedge-fund earnings.

The Treasury Department and the Internal Revenue Service have been working on closing the loophole since 2014, when Senator Ron Wyden, an Oregon Democrat, pressed them for action. Last April, the IRS issued a proposed rule meant to address the strategy, although important parts of it have yet to be written and it hasn’t taken effect yet.

Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and a former member of Obama’s economic team, said Clinton need Congressional approval to achieve her aims.

“It’s going to be an extremely heavy lift,” he said. “If you’re cordoning off the top 3 percent, you’re going to have to try to close the kind of loopholes they use. Middle-class people are not accumulating millions of dollars in their IRAs or using Bermuda reinsurers.”

Also Tuesday, Clinton repeated her call for closing the “carried interest loophole” that allows hedge-fund and private equity managers to pay a lower tax rate. Candidates on both sides of the aisle have come out against the tax treatment of carried interest, which is the cut of investment gains collected by the managers as compensation.

Clinton’s estate-tax proposals would affect four out of every 1,000 estates in the country and would also crack down on additional loopholes, including methods people use to make their estates appear to be worth less than they are, according to the aide.

Details on those plans weren’t immediately available. While the aide said the estate-tax changes would raise $200 billion over 10 years, an estate planner suggested it won’t be easy to collect much.

“High net worth individuals are not going to be affected, because they always find ways not to trigger the estate tax, or the gift tax, or the generation-skipping tax,” said Rocco Beatrice Sr., managing director of Estate Street Partners LLC, an estate planning firm in Newton, Massachusetts. “At the end of your life, you don’t want to own anything in your name, and there are many ways too do that. Smart people have already figured this stuff out.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE