According to insider reporting at the White House, the Trump administration is considering a tax cut that will almost exclusively benefit the rich. If you’re experiencing déjà vu, rest assured, you’re not alone. We have in fact been here before. In 2017, Republicans assured Americans that their $1.9 trillion tax cut for corporations and the rich would create jobs and give workers a $4,000 raise. Instead, corporations spent over $800 billion buying back their own stocks in 2018 alone, while wages went virtually unaffected. One might wonder if Trump thinks the American people forgot he signed that disaster into law, but the reality is this proposal is even more shameless, and does even less for regular Americans.
The Trump administration’s plan is to begin indexing capital gains taxes to inflation. Ordinarily, capital gains taxes are assessed when an investor sells an asset. For example, if an investor purchases an asset for $10 million and sells it for $15 million, then capital gains taxes are due on the $5 million increase. In most cases, however, that sale happens far enough in the future that part of the increase in the nominal value of the asset is actually due to inflation. So if you buy an asset for $10 million in 2019 and sell it for $15 million in 2029, that $15 million may really only be worth $14 million in 2019 dollars. This means that in inflation-adjusted dollars, you only profited $4 million, rather than $5 million.
Champions of this proposal, including Trump economic advisor Larry Kudlow, say the tax code should cut investors a break on that portion. On its face, this doesn’t sound that ridiculous. But looking at the facts of who pays capital gains taxes shows that this is an absurd, tone-deaf proposal that would do nothing but help the richest Americans avoid even more taxes.
Most Americans make all or almost all of their income through wages, and don’t own the kind of financial assets that are subject to capital gains taxes to begin with. As a Penn Wharton analysis finds, 86% of the benefit of indexing capital gains taxes would go to the top 1%, and 99% of the benefit would go to the top 20%. The means four in five Americans would see no to essentially no benefit from this change.
(If anything should be indexed to inflation, it’s the minimum wage, which sits at a meager $7.25 per hour, and hasn’t been updated to reflect the rising cost of living in over ten years.)
In a characteristic display of his contempt for the separation of federal powers, Trump is considering making this change by executive order, without congressional approval. President George H.W. Bush contemplated something similar in 1992, but dropped the idea after lawyers for the Treasury Department informed him that it was doubtful that he had the legal authority to do so. Leading Senate Democrats echoed those concerns this week. These concerns don’t seem to be stopping President Trump.
Whether the administration moves forward with this approach remains to be seen, but beyond the legal questions, the proposal gives away the store to the rich while doing nothing for ordinary Americans.
If Republicans had any interest in improving the American economy, they could focus on making sure the rich are paying their fair share. They could reverse the deep cuts to the corporate tax rate and incentives for offshoring that were created in the GOP’s signature 2017 tax bill. These huge giveaways to corporations and the rich have left workers in the dust. The number of Fortune 500 companies paying zero taxes doubled to 60, while wages and job growth were unaffected.
The American people aren’t fooled by Trump’s claims of a middle-class tax cut. The GOP tax cuts were wildly unpopular from the beginning, and they weren’t even as blatantly tilted towards the rich as this proposal — does Trump he can sell Americans on this one?
Maybe not. This time, Trump isn’t even making the sales pitch. The plan hasn’t been rolled out or publicly announced. Maybe someone in his inner circle had the good sense to talk him out of it. But maybe they’re just biding their time, waiting for a moment when the country is too distracted to pay much attention to them slipping this under the radar. Everyone in this country who cares about tax fairness needs to remain vigilant. The last thing we need to do is another tax giveaway for wealthy investors – we need the wealthiest among us to pay their fair share.