Trump Teases Another Tax Cut

Tuesday, August 11, 2020

Trump Teases Another Tax Cut

President Trump said Monday he’s looking "very seriously" at some new tax cuts.

"We’re looking at also considering a capital gains tax cut, which would create a lot more jobs," Trump told reporters at a White House briefing Monday. "So we’re looking very seriously at a capital gains tax cut and also at an income tax cut for middle-income families. We’re looking at expanding the tax cuts that we’ve already done, but specifically for middle-income families, and you’ll be hearing about that in the upcoming few weeks, and I think it’ll be very exciting."

Trump has repeatedly teased middle-class tax cuts. Last September he said he would announce a "very substantial tax cut for middle income folks" in the next year.

The capital gains tax cut is an idea that has been pushed by some of his advisers but that Trump rejected last September, when a spokesperson said the president did not feel enough of the benefits would go to the middle class. Trump himself said a capital gains tax cut is "perceived as somewhat elitist."

Trump can’t just cut the 20% long-term capital gains tax rate on his own. Congress would have to do that. But some Trump advisers have pressed the president to enact an executive order allowing gains to be indexed to inflation, a change that could dramatically lower taxes due on sold assets that had been held for extended periods. In such cases, no taxes would be paid on appreciation in value tied to inflation.

Fox Business provides an example:

"For instance, if an individual purchased an asset for $100 in 2000 and sold that item 18 years later for $200, the nominal capital gain would be $100, according to the Tax Foundation. But inflation over that same time period would have increased the price level by 49%. Under an indexing proposal, the original selling price would increase to $149 — meaning the individual would only pay a tax on $51, instead of the full $100."

The benefits of such a change would mostly flow to high-income households, with the top 1% receiving 86% of the tax cut, according to 2018 estimates by the Penn Wharton Budget Model cited by Bloomberg News. The model projected at the time that indexing gains to inflation would reduce tax revenue by $102 billion over a decade.

The Tax Foundation similarly found in 2018 that inflation indexing would reduce federal revenue by $178 billion over a decade, or by $148 billion once economic feedback effects were factored into the calculations. But the Tax Foundation analysis said the economic benefits of a cut would be limited, with after-tax incomes rising by 0.2% on average for all taxpayers and the largest increase going to the top 1%, who would see an increase of 0.83%.

Governors Push Back Against Trump Unemployment Plan

The nation’s governors are expressing concerns about the costs to states imposed by Trump’s effort to provide extra unemployment benefits for the millions of workers who have lost their jobs due to the coronavirus pandemic — and whose $600 per week in enhanced unemployed payments expired at the end of July.

Trump signed a memorandum Saturday that attempts to allow states to use disaster-relief funds to pay enhanced unemployment benefits of up to $400 per week, with federal funds providing $300 and states covering the remaining $100. But many state officials say that with tax revenues plunging due to the crisis and social safety net costs soaring, they don’t have the money to participate in the plan as proposed.

"We appreciate the White House’s proposals to provide additional solutions to address economic challenges," a statement released Monday by the National Governors Association said. "[H]owever, we are concerned about the significant administrative burdens and costs this latest action would place on the states."

As an alternative, the NGA — now led by Govs. Andrew Cuomo (D-NY) and Asa Hutchinson (R-AR) — said that Congress and the Trump administration should negotiate a relief package that does not impose "new administrative and fiscal burdens on states," while noting that the governors’ group has previously requested $500 billion from the federal government in unrestricted state aid.

Questions about the Trump plan: Treasury Secretary Steven Mnuchin said over the weekend that the plan would be easy to implement and that states could get it up and running immediately. On Monday, he said that it might take one or two weeks to make operational. But some governors doubt the plan will ever get off the ground. "It’s not workable in its current form," Kentucky Gov. Andy Beshear (D) said Monday.

Some states are waiting for further guidance from the Trump administration on how to proceed, even as officials say they have doubts about the proposal. "The program appears woefully insufficient relative to the scale of the crisis, unworkable in its proposed form, and a bad deal for workers, employers, and states," said a spokesperson for Washington Gov. Jay Inslee (D).

Money is an issue: Aside from the important legal and logistical questions about Trump’s memorandum, most state officials are worried about how they could pay for the new benefits, which would operate outside of the existing unemployment system.

California Gov. Gavin Newsom (D) said the plan would cost his state about $700 million a week, which it could not afford. Cuomo said the additional cost — which he pegged at $4 billion through the end of the year for his state — was like "handing a drowning man an anchor."

The White House has hinted at workarounds on the cost issue. Trump said Sunday that states could apply to have the federal government cover the full $400 weekly cost, although that may violate federal regulations. The Labor Department said Monday that states could include their normal unemployment benefit payments as part of the $100 contribution or use leftover Coronavirus Relief Funds to cover the cost. But state officials say most of those funds have already been obligated.

A short-term fix: The Trump unemployment plan revolves around redistributing about $44 billion in unspent funds at the Federal Emergency Management Agency. Critics have noted that if all states participate, the money would last a little more than a month.

"It’s going to take a long time to set up, and it’s not going to last a long time at all," Josh Bivens of the left-leaning Economic Policy Institute told The Washington Post.

Trumps’ Payroll Tax Deferral Creates Headaches for Employers

Trump pitched his plan to suspend payroll tax collections through the end of the year as a win for workers and a boost for the economy. Employers see it differently. "[F]or companies large and small, the presidential intervention poses difficult legal and logistical questions that only add to the uncertainty that executives and workers are contending with during the pandemic," Alan Rappeport and Gillian Friedman write at The New York Times.

The basics: Trump’s plan calls for a deferral of the 6.2% employee share of Social Security taxes from September 1 through the end of the year for workers earning up to $104,000 a year. But the president doesn’t have the power to change tax laws, meaning that his move would still leave workers on the hook for those deferred payroll taxes starting next year. Trump has promised to "terminate" the payroll taxes, but there’s no guarantee Congress will forgive those deferred payments.

"Since employees must still pay those taxes next year, this order is really an offer of a zero interest loan rather than an actual reduction in tax liability," J.P. Morgan economist Michael Feroli said in a research note Monday. "If every worker utilized this offer, it would free up about $30-40 billion in liquidity per month for the household sector."

What employers are worried about: Business are worried that they’ll be on the hook for employees’ deferred tax payments. "That is a particular risk in cases where employees change jobs and employers can’t withhold more taxes from later paychecks to catch up on missed payments," The Wall Street Journal’s Richard Rubin reports. In some cases, employers could owe income and payroll taxes on the payroll tax payments they have to cover, compounding the cost. Marianna Dyson, a lawyer at Covington & Burling LLP in Washington who specializes in payroll taxes, tells Rubin: "Liability is going to stick to the employer like flies to flypaper."

The bottom line: Employers are generally awaiting further guidance from the Treasury Department and IRS before deciding what to do. "Payroll experts said many businesses would be hesitant to do anything until they had assurances from Congress that they and their employees wouldn’t have to make good on the deferred taxes next year," the Times reports. Right now, it looks like any economic stimulus generated by Trump’s unilateral move may be extremely limited.

What Happens to the Economy Without a Washington Lifeline?

A massive dose of government aid has been helping prop up the U.S. economy in the face of the coronavirus pandemic and the shutdowns it forced. But with any additional federal cash infusions now caught up in stalled negotiations between the White House and congressional Democrats — and with the executive actions signed by President Trump this weekend expected to deliver limited relief at best — the U.S. economy faces significant risks, economist warn.

"We are increasingly concerned that this best-they-can do stimulus from the White House will never make it fully to the execution stage and the economy will be left to sink or swim on its own," Chris Rupkey, chief financial economist at financial group MUFG, told Politico’s Ben White. "Washington is either unable or unwilling to provide a lifeline to those who can't swim like the bankrupt state and local governments and the millions of unemployed who have no jobs to return to."

Rubeela Farooqi, chief U.S. economist at High Frequency Economics, told Politico that, without further stimulus, the recovery could get rocky: "Expiring support is coming against a backdrop of virus containment that is already slowing down activity. Without additional help, incomes and spending will surely retrench. That in turn will have implications for business profitability and jobs."

The White House is taking a far rosier view, with Trump and top advisers still predicting a strong V-shaped recovery. "There is no reason why the economy can’t grow at a 20% pace in the third quarter," Trump said at a Monday press briefing, adding, "It’s going to grow at a very substantial pace, based on all of the numbers we’re looking at, and probably a lot more substantial than we originally thought."

Economist and New York Times columnist Paul Krugman argues that Senate Republicans and the Trump White House are ignoring the economic lessons of the Great Recession and its aftermath. "We actually have a very good road map telling us which policies are likely to be helpful and which will do great damage," he writes in his newsletter. Krugman argues that, while the Federal Reserve can’t save us, government spending can — and deficit concerns should be set aside for now since "in a depressed economy deficits aren’t a problem." Enacting austerity measures, on the other hand, is disastrous.

"But you can probably guess the punchline," Krugman writes. "Donald Trump seems determined to take advice from people who got everything wrong during the last crisis and learned nothing from the experience. We have a very good road map to guide us, but we’re being led by people dead set on driving us into a ditch."

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Trump Teases Another Tax Cut