How can I put more money in your pocket?

Photographer: Melina Mara/Getty Images

How Clinton Can Outflank Trump on Taxes

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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Many commentators say Hillary Clinton is about to make a sharp pivot to the center. But she never drifted far from the center-left to begin with, even with Bernie Sanders snapping at her sensible heels.

Her task now is to give disappointed Sanders supporters, disillusioned independents and #NeverTrump Republicans a reason not to stay home in November.

One way Clinton can do this is through stronger advocacy of tax policies that increase middle-class incomes, whether these changes are aimed at millennials feeling the after-Bern, union workers suffering from manufacturing's decline, or suburban homeowners who haven't seen a pay raise since her husband was president. Putting more money in middle-class pockets will, in turn, boost demand for goods and services and lead to faster economic growth, more job creation and higher tax revenue. 

Such a carefully tailored tax plan would not only show voters she shares their concerns about income inequality, wage stagnation and the lack of good-paying jobs. She could also signal that she isn't the candidate who is proposing recklessly huge tax cuts that blow a hole in the budget, as Trump has (a $9.5 trillion hole, to be exact).

There are many ways she can do this. For one, she could do the opposite of what President Bill Clinton did in 1993, when he pursued an ambitious deficit-reduction plan that cut spending and raised taxes, starting a bond-market boom.

Today, with post-recession demand still too low and interest rates near zero, big spending cuts are not a good idea. Nor would a broad-based middle-class tax cut make sense. Such a policy could increase the budget deficit if, as is likely, tax revenue declined more than spending could be cut. Nor would it help families whose federal income taxes are already quite low (joint filers now pay only 15 percent on earnings up to $75,000), or the millions who have left the workforce entirely and have no incomes to tax. 

Instead, she could raise taxes on wealthy households, perhaps only those with more than $350,000 in income a year, and use the proceeds to help households making less than $100,000 to pay for child-care expenses. At a time when many women are choosing not to work because their wages don't cover the cost of child care, such a step might slow the decline in the U.S.'s female labor-force participation rate, which is one of the lowest in the developed world.  

Hillary-the-pragmatist can go bold in other ways as well. She could, for example, offer a new program of wage insurance to compensate workers who have no income and little chance of finding new employment (laid-off coal miners come to mind) because they lost out to foreign-trade deals, technological advances or environmental regulations. Capping the mortgage-interest deduction at $500,000, from $1 million now, would pay the bill. Many fiscal conservatives should be receptive to these ideas. 

A third proposal, and another one that should appeal to free-market types, would be to lower corporate taxes to 23 percent -- more than Obama's proposed 28 percent and matching the average European tax rate -- from the current 35 percent. At the same time, ending the taxation of corporate income earned abroad would reduce the strongest incentive companies have to move offshore -- and defuse a major rationale for Trump's candidacy. The U.S. is the only developed country that taxes overseas profits. Studies show that lowering corporate taxes would increase wages, because companies would use some of the savings to reward employees.

Already, Clinton has proposed selective tax relief for elderly care, college tuition and health care. She would give tax credits to companies that share corporate profits with employees.

To pay for all that, she would target the wealthy by raising taxes on the sale of securities held for less than two years, capping itemized deductions and adding a 4 percent income-tax surcharge on earnings above $5 million. She would raise the estate tax and adopt the so-called Buffett rule by taxing incomes exceeding $1 million at a minimum rate of 30 percent.

The nonpartisan Tax Policy Center says the tax and spending proposals she has put forward so far would raise slightly more than $1 trillion over 10 years, with about 77 percent coming from the top 1 percent of taxpayers and half from the top 0.1 percent.

So far, so good.

For the fall campaign, though, she needs to show more gumption to distinguish herself from Donald Trump and his sometimes contradictory, often haphazard jumble of policy ideas. A tax-and-spending plan that benefits mostly middle-class households could hit a bull's eye.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Paula Dwyer at pdwyer11@bloomberg.net

To contact the editor responsible for this story:
Katy Roberts at kroberts29@bloomberg.net