Investing in America by Restoring Basic Fairness to Our Tax Code

Clinton’s Plan to Build on the Buffett Rule and end the “Private Tax System” for the Wealthiest

Note: This fact sheet has been updated to reflect additional proposals to make sure the wealthiest pay their fair share.

Hillary Clinton believes that creating good-paying jobs and getting paychecks growing for working families is the defining economic challenge of our time. She knows that if we want the kind of strong, shared growth that leads to rising pay and good jobs, we’ve got to invest in the middle class, and stop stacking the deck for those at the top. Unfortunately, far too often, our tax code is rigged to favor multi-millionaires and billionaires who can exploit loopholes and shelter income in order to avoid paying their fair share. There is essentially a “private tax system” for the wealthiest Americans that lets them lower their tax bill by billions, while working families play by the rules and pay their fair share. In 2013, the 400 highest-income taxpayers – those making more than $250 million per year on average – paid an effective tax rate of just 23 percent,[1] in part because of tax gaming and sheltering to reduce their tax bills. Some multi-millionaires can pay lower rates than their employees. Clinton believes that at a time when pay has risen far too slowly for working families, when America is under-investing in our young people and our infrastructure, it is outrageous that the wealthiest can exploit loopholes and avoid paying their fair share.

Throughout her career, from voting against both Bush tax cuts to calling for the end of special tax breaks for Wall Street money managers, Clinton has stood for making the most fortunate pay their fair share. Last month, Clinton stood side-by-side with Warren Buffett and spoke about the importance of tax fairness. Today, she is offering a plan to build on the “Buffett Rule,” crack down on tax gaming and sheltering, and ensure that the super-wealthy pay their fair share by:

  1. Implementing a multi-millionaire “Fair Share Surcharge.” Hillary will call for imposing a 4 percent “Fair Share Surcharge” on the 2 out of every 10,000 taxpayers making more than $5 million per year – who are the most likely to benefit from tax planning. This surcharge is a direct way to ensure that effective rates rise for taxpayers who are avoiding paying their fair share, and that the richest Americans pay an effective rate higher than middle-class families.
  2. Shutting down the “private tax system” for the most fortunate, starting by immediately closing egregious loopholes. Hillary will call for strengthening the Buffett Rule by broadening the base of income subject to the rule. This means immediately closing egregious loopholes, like the Bermuda reinsurance loophole and the “Romney loophole” that let the most fortunate avoid paying their fair share. That also means closing the “step up in basis” loophole, which lets the highest-income Americans escape paying their fair share on assets passed to heirs.
  3. Restoring fair taxation on multi-million dollar estates. Hillary is proposing to restore the Estate Tax to 2009 parameters, which would ensure some of the largest, multi-million dollar estates are not exempt from paying their fair share. And she would go beyond that for estates valued in the tens or hundreds of millions of dollars. She will also close complex loopholes, including methods that people can now use to make their estates appear to be worth less than they really are. The Estate Tax is a tax on the very largest estates that would only affect 4 out of every 1,000 estates after Clinton’s reforms. [2]
  4. Ensuring millionaires can no longer pay a lower rate than their secretary. Hillary will reiterate her call for the “Buffett Rule,” which ensures that those making more than $1 million per year pay at least an effective tax rate of 30 percent.

The full details of Clinton’s plan are described below:

  1. Implement a multi-millionaire “Fair Share Surcharge.” Clinton is calling for a multi-millionaire surcharge as a direct way to ensure that the most fortunate pay their fair share. As a result of loopholes and the “private tax system” of lawyers and accountants who enable complex strategies to shelter and lower the bill on income for the most fortunate, some of the wealthiest taxpayers continue to pay low effective rates on their income. Today, one-quarter of the top 400 taxpayers who make on average $250 million per year pay less than a 20 percent effective Federal income tax rate[3]– and the top 400 taxpayers pay an overall effective rate that is around 7 percentage points lower than the mid-1990s, a period of strong, shared economic growth. As part of her plan for expanding on the Buffett Rule, Clinton’s plan calls for a 4 percent multi-millionaire “Fair Share Surcharge” on the top 0.02 percent of taxpayers on their income above $5 million per year – affecting roughly 2 out of every 10,000 taxpayers. The experience of the past few years shows that a surcharge can directly raise the effective rates on the very-highest-income taxpayers, in ways even their tax maneuvers cannot game: as a result of President Obama securing the end of the high-income Bush tax cuts and other measures, the effective rate paid by the top 400 taxpayers rose from less than 17 percent to the most recent rate of 23 percent.[4]
  2. Shut down the “private tax system” for the wealthiest, starting by immediately closing specific egregious loopholes. Some of the most fortunate taxpayers in the country – often those making multiple millions per year, or with billions of dollars in wealth – are able to game the system by sheltering their income or using exotic tax gaming to avoid paying their fair share. As a recent New York Times story explained, “Operating largely out of public view…the wealthy have used their influence to steadily whittle away at the government’s ability to tax them. The effect has been to create a kind of private tax system, catering to only several thousand Americans.”[5]

Hillary is committing to shutting down the private tax system for the ultra-wealthy, by closing loopholes that exist today, and remaining vigilant for new loopholes lawyers and accountants try to find next. The ultra-wealthy should not be able to exploit loopholes and leave middle-class families who play by the rules holding the bag. Today, she is announcing several examples of proposals to crack down on specific tax shelters and strategies, and will continue make closing egregious loopholes a priority throughout her administration:

  • End the Bermuda reinsurance loophole, and tax gaming through complex derivative trading: High-income money managers have used loopholes related to foreign reinsurance – often located in Bermuda – to avoid paying their fair share.[6] And they take advantage of complex derivative trades to lower their tax bill.[7] Clinton would build on proposals from both Democrats like President Obama and Republicans in Congress to close down these two loopholes.
  • Close the “Romney Loophole” that allows sheltering multiple millions in retirement accounts: According to data from the Government Accountability Office, roughly 1,000 taxpayers have accumulated close to $100 billion dollars in tax-preferred retirement accounts, with balances of more than $10 million per taxpayer.[8] Clinton believes that we should encourage robust retirement savings by American families – but that retirement accounts should not become a shelter from taxation for the most fortunate. She would build on proposals by President Obama in calling for closing down the so-called “Romney Loophole”[9] by limiting the ability of the very wealthiest to game the system by sheltering large incomes in tax-preferred accounts.
  • Impose a “risk fee” on the largest financial institutions. Dodd-Frank’s reforms and higher capital requirements on the largest banks are already helping address the problem of “Too Big to Fail.” But, as Clinton has said throughout this campaign, we need to go further to deal with the risks posed by the largest financial institutions. That's why Clinton would charge a graduated risk fee every year on the liabilities of banks with more than $50 billion in assets and other financial institutions that are designated by regulators for enhanced oversight. This proposal will raise $150 billion in revenue over 10 years.
  • Close the “carried interest” loophole: For almost a decade, since she was a Senator, Clinton has called for closing the “carried interest” loophole that allows hedge fund, private equity, and other Wall Street money managers to avoid paying ordinary income rates on their earnings. With the top 25 hedge fund managers making more than every kindergarten teacher in the country combined, there is absolutely no reason for this tax loophole.
  • Commit to tax fairness beyond closing these specific loopholes – especially on capital income: Beyond these specific loopholes, Hillary will continue to take steps to ensure the most fortunate cannot game the system and avoid paying their fair share. Already in this campaign, she has called for raising capital gains rates for short-term trading, in order to encourage long-term investment. But long-termism should never be an excuse for persistently and continuously sheltering income from fair taxation. That is why Clinton will go beyond the loopholes identified above to reform capital taxation, and explore additional measures to prevent high-income taxpayers from misclassifying income as capital gains or avoiding paying tax on some income at all. For example, she would limit the tax benefits of “like-kind exchanges,” which prevents capital gains taxation on certain sales. She will rationalize the Affordable Care Act’s net investment income tax to prevent gaming by high-income taxpayers.  And she will close the “step up in basis” loophole that lets accumulated capital gains go untaxed when assets are passed on to heirs – a loophole where 80% of the benefits go to the top 0.1% of taxpayers earning more than $2 million per year.   Her plan will treat bequests as a realization event. It will include exemptions to ensure this change only affects the high-income families who by far benefit the most from this loophole, and protects middle-class families. And it will contain careful protections and flexibility for small and closely-held businesses, farms and homes, and personal property and family heirlooms. She will make strong enforcement against the “private tax system” for the extremely wealthy a priority for her administration.
  1. Restoring fair taxation on multi-million dollar estates. Clinton is joining President Obama and other Democrats in calling for returning the Estate Tax to 2009 parameters, and lower the exemption for the Estate Tax from almost $11 million today, while raising the Estate Tax rate. And she will go further than that for estates valued in the tens and hundreds of millions, with higher rates as values rise, up to a 65% rate on estates valued at over $1 billion per couple. Hillary has called for Estate Tax reform for more than a decade, and embraced similar proposals in her 2008 presidential campaign. The Estate Tax only impacts the very largest estates, and the reformed Estate Tax would only affect the wealthiest 4 out of every 1,000 estates in the country.[10]Her plan would also crack down on loopholes in the Estate Tax, including methods that people can now use to make their estates appear to be worth less than they really are.[11]
  2. Ensure millionaires can no longer pay a lower rate than their secretary.When Hillary stood with Warren Buffett last month, he pointed to his own taxes as proof of the fundamental unfairness of our tax system. He has earned billions and yet, year after year, he pays a lower effective tax rate than his secretary.[12] In addition to the surcharge and specific loophole closers outlined above, Clinton is reiterating her call for the Buffett Rule, which ensures that millionaires must pay at least a 30 percent effective rate. Plain and simple, this rule of basic fairness ensures that the wealthiest Americans no longer pay a lower effective tax rate than the middle class.

[1] Internal Revenue Service, “The 400 Individual Income Tax Returns Reporting the Largest Adjusted Gross Incomes Each Year, 1992–2013,” (December 2015) (Available athttps://www.irs.gov/pub/irs-soi/13intop400.pdf).

[2] Urban-Brookings Tax Policy Center, “Estate Tax Returns and Liability under Current Law and Various Reform Proposals,” (December 13, 2012) (Available athttp://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3638&topic2ID=60&topic3ID=66&DocTypeID=).

[3] See Internal Revenue Service, supra Note 1.

[4] See Internal Revenue Service, supra Note 1.

[5] Scheiber, Noam and Patricia Cohen, “For the Wealthiest, a Private Tax System That Saves Them Billions,” New York Times, (December 29, 2015), (Available athttp://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html?_r=0).

[6] Joint Committee on Taxation, “Background and data with respect to hedge fund reinsurance arrangements,” (July 30, 2014) (Available at https://www.jct.gov/publications.html?func=startdown&id=4745).

[7] Rebecca Wilkins, “What the heck is a derivative and why do we care?” Tax Justice Blog (July 24, 2014) (Available athttp://www.taxjusticeblog.org/archive/2014/07/hedge_fund_managers_in_the_hot.php)

[8] United States Government Accountability Office, “Individual Retirement Accounts: IRS Could Bolster Enforcement on Multimillion Dollar Accounts, but More Direction from Congress Is Needed,” (October 2014) (Available at http://www.gao.gov/assets/670/666595.pdf).

[9] This issue gained attention in 2012, on reports that Republican Presidential candidate Mitt Romney had tens or hundreds of millions of dollars in his IRA account. See William D. Cohan, “The secret behind Romney’s magical IRA,” (July 15, 2012) (Available athttp://www.bloombergview.com/articles/2012-07-15/the-secret-behind-romney-s-magical-ira).

[10] Urban-Brookings Tax Policy Center, “Estate Tax Returns and Liability under Current Law and Various Reform Proposals,” (December 13, 2012) (Available athttp://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3638&topic2ID=60&topic3ID=66&DocTypeID=).

[11] Zachary R. Mider, “Accidental tax break saves wealthiest Americans $100 billion,”Bloomberg, (December 17, 2013) (Available athttp://www.bloomberg.com/news/articles/2013-12-17/accidental-tax-break-saves-wealthiest-americans-100-billion).

[12] Chris Isidore, “Buffett says he’s still paying lower tax rate than his secretary,” CNN Money, (March 4, 2013) (Available at http://money.cnn.com/2013/03/04/news/economy/buffett-secretary-taxes/)