Economy and Politics: 10+ Talking Points Neither Party Will Give You

With the 2020 Presidential election looming just weeks away, it has become increasingly difficult to get straight and direct answers from either candidate or party. Instead, we get spin and the pros of every policy, as they dodge the question or change the subject entirely when it comes to talking about the downsides or risks of proposed policies. The economy and politics are closely related, particularly in election years. And while candidates may tout tax cuts for everyone, while the other promises tax increases only for the rich, if this year has taught us anything, it's just how interconnected our economy is and that every policy has ripple effects.

So, I collected the economic questions and financial topics you want to better understand before November 3rd. Your questions focused on taxes, healthcare, national debt, government spending, and campaign finance. I promise to attempt to answer them as best I can, supported by historical data, policy history, and facts.

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Economy and Politics: How Will Candidates' Policies Impact YOU

I think I can safely say we were all appalled, horrified, disgusted, [fill in your favorite adjective for disappointment here] with the lack of substance or policy discussion in the first Presidential debate. And now the second debate has been canceled. However, the third debate is ON for this Thursday, October, 22nd at 9pm ET, and both parties have published platforms that outline their policy positions, on everything from foreign policy and immigration, to healthcare and education.

I highly encourage all voters to read both platforms. It becomes incredibly clear what each party represents, where they sit on the intersection between the economy and politics, and where their priorities lie. Republicans believe a smaller federal government, leaving choices to individuals and states, with fewer regulations, creates prosperity and equal opportunity for everyone. Democrats believe larger government is necessary to create jobs, lead social change, right inequalities, and provide healthcare for all.

These are philosophical differences with broad reaching implications. Each of you have to decide which view you agree with, and often the candidate voters support varies because of the individual issues you care about most, and how those weigh into your decision. As demonstrated by this survey of registered voters by Pew Research, Trump and Biden supporters' top issues vary, but top of the list across the board is the economy and healthcare.

Let's Talk Taxes

Before we talk about where each party stands on taxes, it's important to understand how taxes in America have evolved over time, and how they compare to the rest of the world. I'll break this down between personal income taxes, that we as individuals pay on earned income, as well as investment gains, and corporate taxes paid by businesses.

What Do Current Tax Receipts Look Like?

Currently, the bulk of US federal revenues come from income taxes and social insurance. Corporate taxes have shrunk overtime, but employers do pay half of social insurance taxes.

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Personal Income Taxes

When our country began, there was no personal income tax, or even a constitutional right of the government to collect them. The government made most of its revenue through tariffs on trade. The financial burdens of the Civil War prompted the first income taxes in the 1860s. Then, in the early 1900s, post World War I, when Europe was in economic shambles, trade faltered and again, the government turned to income taxes to raise revenue.

Give this a listen: NPR's Planet Money - Taxes & Donald Duck

The 16th Amendment, passed in 1909 and signed into law in 1913, gave Congress the constitutional right to assess a federal income tax. In the early years, income taxes were minimal - just 1-2% - and only impacted the top 1% of wage earners.

Over the years, the tax code got more complicated. In the 1930s and 1940s, there were as many as 30 different tax brackets, with maximum marginal rates as high as 94% on those earning over $200,000. In the early 1990s, the tax bracket was simplified to just 2 brackets, and has since expanded again to 5, with the top marginal rate varying between 35-40%.

Trump Tax Cuts

In 2017, President Trump overhauled the tax code with the biggest change in 30 years, making cuts to both personal income taxes, as well as corporate taxes (more on that in a minute). These changes were passed by Congress and signed into law in December 2017, and first impacted 2018 taxes.

Read More: 8 Things All Moms Need to Know About the 2017 Tax Bill

He increased the standard deduction for everyone to try and simplify tax returns and eliminate itemized deductions. Marginal rates improved across the board. It also repealed the individual insurance mandate and the 2.5% of income penalty that was set to begin in 2019.

Biden's Tax Plan

Biden has publicly said he plans to repeal the Trump tax cuts. His campaign has since restated this to mean just on high-income earners, those making more than $400,000.

He proposes raising the top income tax bracket back to 39.6% (from 37%). He also proposes limiting the tax benefit of itemized deductions to just 28% for those earning over $400,000 (like for contributions to your 401k). In addition, he wants to raise the long-term capital gains rate in investment gains to the full ordinary income rate, 39.6%, for those earning more than $1 million. And he also has proposed a Social Security payroll tax of 12.4% on earnings over $400,000. Currently, you and your employer split this tax (6.2% each) on earnings up to $137,700, at which point there are no more payroll taxes.

How Our Income Taxes Compare to the Rest of the World

Compared to the rest of the developed world, we pay relatively low levels of personal income tax. The Organisation for Economic Co-operation and Development (OECD) analyzes and tracks economic data for developed and developing nations around the world.

The look at personal tax rates, including social insurance, like social security and Medicare - think the FICA line on your paycheck. The also then includ the employer portion of these taxes as well. Many are not aware that your employer pays an amount in most cases equal to your contribution as well.

The chart above depicts the average personal income tax rate associated with someone earning average wages in each country. The US currently falls at the low end of this chart. Many people point to other countries offerings of socialized healthcare or free college - but it is imporant to note that those come at a cost of higher personal income tax rates... and not just for the highest income earners, but everyone.

Corporate Income Taxes

Alright - now let's talk about Corporate Income taxes. These rates too have varied over time.

Corporate taxes are more volatile than income taxes, as corporate profits can vary more dramatically with the economic environment than do incomes. You'll see the spikes and troughs in the chart above are more closely associated with recessions and recoveries than rates.

The other big difference with corporate taxes? Corporations can shift where their profits are generated - especially multi-national ones - far more easily and readily than you or I can move with our incomes. This makes corporate tax rates around the globe even more relevant.

Trump Tax Cuts

In 2017, just as with personal income taxes, the tax bill passed by Congress and signed into law by President Trump dropped the corporate tax rate to a single 21% rate.

Along with state and local taxes, this drop, made the US corporate tax rates more competitive with other developed countries around the world. Prior to 2018, the fededral corporate tax rate of 35% was the highest among developed nations.

Biden Tax Plan

Biden has proposed raising the corporate tax rate from 21% to 28%. He also proposes the institution of a corporate alternative minimum tax of 15% for any business with book profits over $100 million, so no matter the deductions, a large business would pay at least 15%.

Many of you have asked why he plans to raise taxes. The answer is that he needs more tax revenues to pay for all the proposed increases in spending he has planned. More on that in a moment.

According to the Tax Foundation, an independent, not-for-profit founded in 1937, the Biden Tax Plan would raise an additional $3 trillion in the next 10 years, absent any other changes, but just $2.65 trillion with additional macroeconomic feedback effects (aka when individuals and businesses react). It projects the impact of this plan would lower long-term GDP growth by 1.5%, with the bulk of that tied to the changes in the corporate tax rate.

It's important to note that not all economists agree. Other studies - by Oxford, which accounts for a slimmed-down version of Biden's plan actually passing Congress, and Moody's, say his plan would boost GDP and jobs growth.

Let's Talk Federal Government Spending

The government collects taxes for one main reason - it needs something to support all its spending!

And over time, the federal government has almost always spent more money than it brings in. Every year there is a deficit, it adds to our national debt - just like you funding spending that exceeds your income on a credit card. Deficits expand signficantly in periods of war, and economic downturns, like we are currently experiencing. Deficit spending has been perpetuated by both parties. The only time there wasn't a federal deficit in recent history was under President Clinton in the late 1990s, when he benefitted from heightened earnings during the tech bubble.

Read More: What Happens in a Recession

What Does the Federal Government Pay For?

To understand what drives the federal deficit, you have to understand where the money the federal government spends goes. I've highlighted the largest components of federal spending in the chart below. The single biggest cost? Social Security. It accounted for $1.0 trillion of the $4.4 trillion spent in 2019.

The most concerning thing about the federal budget is this... 70% of the spending is legally or contractually mandated, making lowering the budget exceedingly difficult. Any time we add to entitlements or create laws that add to spending, it is locked in... unless laws change or we significantly increase incomes to reduce income-based entitlements.

Each year, the White House puts forward a budget proposal, but Congress has ultimate say and control over the budget that gets approved and how funds are appropriated, or allocated, much of which is already determined by existing law.

In 2020, the budget as proposed back in January has gone entirely out the window in the face of the pandemic. According to projections by the Congressional Budget Office, as of September 2020, the current deficit for FY 2020 stands at $3.3 trillion - we have spent $6.6 trillion, while only bringing in $3.3 trillion in revenue.

Biden Spending Plan

Biden's proposals would add $5.4 trillion in federal spending over the next decade, according to a study by Wharton, published in the WSJ.

According to the Wharton model, this spending would be driven by Infrastructure ($1.6 trillion), Education ($1.9 trillion), Housing ($650 billion), Paid Leave ($527 billion), Social Security and Healthcare. It is only offset by $3.4 trillion in proposed revenue increases.

Let's Talk about the National Debt

The national debt is currently over $27 trillion. This represents over $82,000 per US citizen, and more than $217,000 per US taxpayer. This is only the federal debt. It currently represents nearly 140% debt to GDP, the highest level ever, even exceeding the level during WWII, when it reached 118%.

I have covered in the post below earlier this year, the concerns around our rising national debt levels, including who owns the debt, how we pay for it, and how the net interest on the national debt crowds out spending for more important issues you care about.

Related Post: How the National Debt Impacts YOU

For those who want to discuss the national debt further, I invite you to join us in our reading of The Mandibles for the #FFMBookClub discussion this December. Learn more about the Family Finance Mom book club here or at the Instagram post below.

https://www.instagram.com/p/CFx-kK6Ffpj/

Let's Talk Healthcare

In 2018, the US spent $3.65 trillion on healthcare expenditures, representing nearly 18% of GDP and over $11,000 per person. And even more concerning is the rate of growth - as healthcare expenditures are growing more rapidly than GDP, and have been for years.

There are actually two separate, but linked, issues here: the overall cost of healthcare in the United States and how we pay for it. The political debate concentrates predominantly on how we pay for it.

How Do We Pay for Healthcare in the US

So, how do we pay for it? Most of it - 75% - is covered via health insurance. But it is important to note, that federal, state and local governments account for nearly half of all non-investment healthcare expenditures, and over half of health insurance coverage expenditures through programs like Medicare, Medicaid, CHIP (children's insurance), and military programs.

And in 2010, with the passage of the Affordable Care Act, President Obama took legislative action to address how healthcare is paid for in the US, and to try to make sure everyone could be covered by insurance.

Let's Talk Campaign Finance

First, let's talk about what the Federal Election Commission actually legally allows as contributions. Then, I'll talk about the loopholes that allow individuals to contribute millions more.

Federal Campaign Contribution Limits for Individuals

The Federal Election Campaign Act of 1971 subjects individual campaign contribution to limits. For the the 2019-2020 federal elections, the limits are as follows:

• $2,800 per election to the Candidate committee - so you could contribute that amount for both the primary and the general election
• $5,000 per year to PACs
• $10,000 per year to state, district and local Party comittee(s)
• $35,500 per year to the national Party commitee
• $106,500 per account per year for additional national Party committee accounts, including the nominating convention, election recounts and legal proceedings, and national party headquarters.

It should also be noted, that a party’s national committee, Senate campaign committee and House campaign committee are each considered separate national party committees with separate limits. Given all those contribution limits at different levels, committees and campaigns, you can see how total contribution limits could add up, and quickly.

You will hear campaign contributions referred to as hard money or soft money. Hard money are contributions made directly to candidates, while soft money is given to party or committees, and contributions to PACs have no limits, though PACs are limited in how much they can give to candidates.

Citizens United

Citizens United v. Federal Election Commission was a landmark Supreme Court decision made in 2010 that dramatically changed campaign finance. The Court upheld that the free speech clause of the FIrst Amendment prohibits the government from restricting independent expenditures for political communications by corporations, including nonprofits and labor unions.

The case came about after a conservative non-profit, Citizens United, wanted to advertize a film critical of HIllary Clinton shortly before the 2008 Democratic primary. At the time, this was in violation of a Bipartisan Campaign Reform Act, passed in 2002, that prohibited any corporation or labor union from making election communication within 30 days of a primary or 60 days of an election, or spending any money advocating for any candidate at any time.

Ironically, since the decision was made in 2010, presidential campaigns had spent les... though that may change this year.

How Much Has Been Spent

Several of you have asked me if whoever raises and spends the most wins... and the answer is no. But here's just how much they have spent... this is a good indication of past eleections.

For the current election, the data below is updated through September 30, 2020, from OpenSource.org.

For more insights into how campaigns spend their money and choose where they target their spending, check out this podcast.

Give this a listen: NPR's Planet Money - Political Ad Nauseum

Economy and Politics: The Impact

So how do these differing views on policy impact the overall economy? It can be very difficult to attribute economic metrics to any specific policy or President. Each President inherits the policies of their predecessor, and often, as with the Affordable Care Act, the full impact - both the benefits and the costs - of policies do not even occur before a President has left office. They also inherit the economy of their predecessor and experience events that are not always entirely in their control: 9/11 and the Great Recession for President Bush, the Great Recession recovery for President Obama, the Pandemic for President Trump.

So instead, I will leave you with the time series of several economic metrics, and allow you to decide how the policies we have discussed above impacted them, and what that means for the policies you wish to support going forward.

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It's a lot to take in. And there are many factors to weigh. I've only address economics and healthcare policies above. No matter who you support, more than anything, I hope you all continue to educate yourselves and above all, get out and exercise your right to vote... be it by mail, early in person or on election day in person.

Have questions? Send me a DM on Instagram or leave them in the comments below. As always, I appreciate this community's ability to have constructive conversations about controversial topics with candor, respect and grace.

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