Trump has repeatedly floated a cut to capital gains taxes, which are taxes paid by investors on profits made when an asset, like stock or real estate, is sold. The capital gains tax rate is already 35% lower than the top income tax rate, and only about 6% of households in the bottom 80% of earners claim any capital gains, meaning the overwhelming majority of benefits would flow to the wealthy.
White House economic adviser Kevin Hassett argued over Memorial Day weekend that the administration opposed extending enhanced unemployment benefits despite a quarter of the labor force losing their jobs since the pandemic hit the United States. Hassett told CNN the administration would “consider” another round of $1,200 direct payments to Americans but is more focused on stimulating the economy through tax cuts.
“Right now, it looks like the economy’s picking up at a very rapid rate, in which case we could potentially move on to other things that the president has mentioned, like the payroll tax cut and potentially even a capital gains holiday,” he said.
The idea of a capital gains tax holiday was met with skepticism by economists.
“Capital gains tax cuts are poorly targeted benefits,” writes the nonpartisan Tax Policy Center, which noted that 75% of tax filers who reported capital gains last year were in the top 1% of earners.
“About 6 percent of households in the bottom 80 percent reported any capital gains income at all, compared with 83 percent of those in the top 0.1 percent,” said Tax Policy Center co-founder Leonard Burman, who previously served at the Treasury Department and the Congressional Budget Office. “That elite group (incomes over $3.8 million) accounted for more than half of all long-term capital gains, reporting an average gain of $5.5 million.”
The analysis suggests the tax cut would do little to ease the pain of the economic shock caused by coronavirus-related lockdowns to the vast majority of Americans. But Burman notes that it would also “do little to boost the economy since rich people spend only a fraction of any additional income” and because “capital gains income may be hard to come by in the next few years given asset price declines.”
In other words, even the benefits to the wealthy would not fully kick in until well after the economic crisis has eased.
The cut would also do little to boost the stock market, which has been the president’s primary concern. Less than a third of corporate stock is subject to capital gains taxes, according to a Tax Policy Center report, and even stock in taxable accounts is often untaxed because many assets are held until death or donated to charity. And new investors would defer the taxes for as long as they want since they don’t kick in until the investment is sold.
The economic conditions do not warrant such a tax cut, argued Karl Smith, the vice president for federal policy at the business-friendly Tax Foundation.
“There is no [investor] shortage to be eliminated. Even modern supply-side models of the economy suggest that a capital gains tax cut would have a tiny effect on long-term GDP,” he wrote at Bloomberg, joking that “Republicans’ preferred solution to any problem, whether a recession or an alien invasion, is to cut the capital gains tax.”
Steve Wamhoff, the director of federal tax policy at the liberal-leaning Institute on Taxation and Economic Policy (ITEP), argued that “proponents of capital gains tax breaks have always offered a weak argument that they encourage investment” but Trump’s proposal is more dubious given that it is only a temporary cut.
A temporary cut “is supported by no argument at all,” Wamhoff said, since “it would only reward investments made in the past while doing nothing to encourage new investment.”
In other words, a capital gains tax holiday would allow investors to sell off decades of past investments without paying any tax while doing nothing to boost new investment.
House Speaker Nancy Pelosi, D-Calif., slammed the administration’s proposal for ignoring the needs of average Americans.
“If you want to compare the need for us to change the capital gains tax, which, once again, once again, ignores the fact that there are people in our country that are hungry, and that there is some equivalence to that, I respectfully disagree,” she told Bloomberg. “There are certain things that are urgent.”
The capital gains tax holiday is just one of several tax cuts the administration is considering as part of its coronavirus relief effort. While House Democrats proposed a $3 trillion bill that would provide aid to states and local governments, extend unemployment benefits, and issue a new round of $1,200 payments, Senate Republicans have said the proposal is “dead on arrival” as they focus on more pro-corporate policies, like protecting companies from liability from coronavirus-related lawsuits.
The Trump administration is pushing to include a payroll tax cut, which Trump has called for repeatedly in lieu of direct payments to no avail for months, in the upcoming legislation.
Like the capital gains tax cut, a payroll tax cut would overwhelmingly benefit the richest Americans while doing little to boost the economy in the short-term.
A study by ITEP estimated that two-thirds of the benefits from the tax cut would go to the richest 20% of taxpayers. The payroll tax cut would also do nothing to help the 40-plus million Americans who have lost their jobs.
By comparison, the poorest 20% of Americans would receive just 2% of the benefits and the next poorest 20% of Americans would receive just 6% of the benefits.
“A payroll tax cut would help those lucky enough to keep their job and would provide a bigger break to those with more earnings,” the ITEP analysis said. “Sending checks to every household would be a far more effective economic stimulus because it would immediately put money in the hands of everyone who would likely spend it right away, pumping it back into the economy.”
The payroll tax is also used to fund Social Security and Medicare, which would inevitably see cuts if the revenues are slashed.
“Make no mistake: by pushing to cut off the program’s funding stream, President Trump is taking the first step toward dismantling Social Security,” warned Max Richtman, the head of the National Committee to Preserve Social Security and Medicare. “The president’s campaign to eliminate payroll taxes is a violation of his patently false promises to seniors ‘not to touch’ Social Security… Choking off Social Security’s funding stream is an existential threat to seniors’ earned benefits.”
Economists rejected the idea that such a corporate tax cut would help amid the pandemic.
The proposal is “like trying to graft supply-side Reaganism onto conservative populism,” Samuel Hammond, a policy expert at the conservative Niskanen Center, told The Washington Post. “A lower corporate tax rate probably won’t suffice to build an entirely new factory within U.S. borders.”
“It’s ridiculous. Companies moving their supply chains back from China is not the crisis to address when 30 million people are unemployed,” added Adam Ozimek, the chief economist at the freelancing marketplace Upwork. “This is a distraction at best and could be destructive at worst.”
House Democrats likewise rejected the plan.
“The current health crisis produced by multiple Administration failures, said Rep. Lloyd Doggett, D-Tex., who sits on the Ways and Means Committee, “hardly justifies another windfall for those at the top.”
The proposed tax cuts drew eye rolls from experts, who criticized Republicans for pushing tax cuts as a universal panacea.
“At this point it’s almost a pathology. Whatever the crisis, whatever the state of the economy, Republicans crave another tax cut for the rich,” wrote Washington Post economic columnist Catherine Rampell. “One possible explanation is self-interest: Some important Republican constituents live off their wealth rather than the sweat of their brows.”