Clinton's Profit-Sharing Plan 101

How the Candidate's Plan Might Affect You

Clinton's Profit-Sharing Plan 101
July 28, 2015

Profit sharing is an excellent way for a company to engage their workforce and give workers a stronger stake in the company's success. Should she become the next President, Hillary Clinton would like to encourage the use of profit sharing as a way to boost middle-class incomes without excessive burdens to businesses.

Clinton's basic plan is to establish a two-year tax credit for companies that institute a profit-sharing program. Calling it a "win-win" at a recent speech, she pointed out how studies have linked profit sharing to increased productivity for businesses and more money for workers. Theoretically, the "Rising Incomes, Sharing Profits" program addresses the disconnect between rising corporate profits and stagnant wages for workers, especially those in the lower and middle classes.

The proposed tax credit is equal to 15% of the shared profits — a significant sum for a credit that comes directly off a corporate tax bill.

To direct the benefits of the profit sharing toward lower income levels, the proposal contains a series of provisions that have yet to be fully defined. Profits that are eligible for the credit will be capped at a 10% overage on the employee's current wages. Higher-income employees will be phased out of the credit, similarly to income-based phase-outs for individual federal tax credits. The overall benefit to any single company will be capped to avoid excessive credits to large corporations. Smaller businesses will be eligible to receive a higher tax credit, giving them greater incentive to adopt a profit-sharing plan.

Clinton intends to debate these limits through working with business, labor groups, and other interested parties in working group meetings with her Treasury Secretary. This working group will guide efforts to protect against abuses by companies — such as shifting wages to profit sharing just to get the tax credit or manipulating profit numbers.

The devil, as always, will be in the program details. In the best case, the plan will be quite complicated (just like our tax code) in order to tilt the benefits toward smaller businesses and lower-wage workers and away from higher-paid workers and larger corporations. The more complicated the law becomes, the more likely it is to fall victim to the Laws of Unintended Consequences.

For example, how will the bill deal with companies that already share profits? The Washington Post reports that nearly 36% of employees are already covered by some form of profit sharing — will these companies be eligible for some form of tax break, too? Otherwise, the newer companies will have an unfair advantage by adopting the same programs that companies that are more conscientious have already instituted. Also, what will happen when times are tough and profits fall? Will companies have flexibility to adjust for company losses?

As for costs, Clinton's plan assumes that the estimated $10-$20 billion cost over a decade will be paid for by closing unspecified tax loopholes. The campaign says that the targeted loopholes will be revealed as part of a more comprehensive platform in the upcoming weeks and months. Tax credits often cost far more than their projections and tend to be extended by Congress past their intended life, so the claim that the program will be fully paid for merits some serious scrutiny.

Theoretically, if you are a middle class worker, this program should put more money into your pocket or your 401(k). Whether it really does depends on how the program is restricted (and, of course, on Hillary Clinton's election). Restrictions and regulations could end up being so complicated that companies decide it is not worth the effort to get the tax break.

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