President Trump speaks during a meeting with Cabinet members and Republican members of Congress in June. (Evan Vucci/AP)
Reporter

President Trump campaigned as a different kind of Republican who would raise taxes on the rich so much that it was going to “cost” him “a fortune.” So, of course, he’s considering a plan that would almost exclusively give a near-exclusive tax cut to the wealthy investors who came out way ahead on his last tax plan — and this time he’d even bypass Congress to do it.

Nothing says populism like giving billionaires a tax cut by executive fiat.

Now, the idea is that the Treasury Department might unilaterally change how it defines a capital gain. Right now, that’s just the difference between the price you buy and sell an asset at. But they’d like to make it the difference between the price you buy and sell an asset at adjusted for inflation. This seemingly technocratic adjustment would have the effect of cutting taxes on investment by quite a bit.

Consider a case where, say, a dynastically wealthy family bought $1 million worth of stock, and then, after 10 years where overall prices had gone up by 50 percent, sold it for $2 million. Under the current system, they’d owe capital gains on the $1 million their stock had gone up, which, at the prevailing tax rate of 23.8 percent, would translate into a $238,000 tax bill. But if this were adjusted for inflation, they’d have to pay taxes only on the $500,000 gain that wasn’t caused by prices going up — 50 percent inflation would mean it was as if they’d bought the stock for $1.5 million in today’s dollars — so they’d only have to pay Uncle Sam $119,000.

The obvious point here is that the more capital gains you have, and the longer you can afford to hold them, the more this would be worth to you. Which is to say that it would only help people at the very top of the income ladder. Indeed, the analysts at the nonpartisan Penn Wharton Budget Model estimate that the bottom 95 percent of households would only receive 5 percent of all the money from this tax cut. The 95 to 99 percent, meanwhile, would get 8.9 percent of it, the 99 to 99.9 percent another 23 percent of it, and the top 0.1 percent would take home a whopping 63.1 percent of the total. Even for them, that’s real money when you’re talking about what would in all be a $100 billion tax cut over the course of the next decade.

The typical justification for this largesse is that cutting taxes on investment should make wealthy people invest more, which would eventually make the economy so much more productive that everyone would end up better off. There’s a side benefit, though, to doing this by indexing capital gains to inflation rather than just cutting the capital gains rate itself. That’s that it might make the Federal Reserve, which tries to keep inflation so low because it’s a de facto tax on investment, more willing to tolerate the slightly higher price increases we need in our near-zero-interest-rate world. And by insulating well-to-do investors from the negative effects of higher prices, it should make them less opposed to expansionary monetary policy as well.

But there’s a problem with all these arguments in favor of shoveling more cash into the pockets of rich investors. They’re not convincing. While it’s true in theory that lower taxes on investment should lead to higher amounts of it, it’s not clear that this is actually true in practice. University of California at Berkeley economist Danny Yagan, for one, found that George W. Bush’s big dividend tax cut, which was supposed to make corporations invest a lot more money, did no such thing. Businesses that were subject to that tax cut, you see, didn’t start investing any more relative to the ones that weren’t. And it’s been the same sort of story with Trump’s earlier corporate tax cut. That was — stop me if you’ve heard this one before — supposed to set off an investment boom that hasn’t really materialized so far. In fact, business investment actually decelerated in the second quarter of this year.

It’s almost like investment decisions depend on more than just taxes.

As for the Fed, it doesn’t need any more reasons to increase its inflation target. The fact that it looks like interest rates will fall back to zero the next time there’s a recession, making it harder to stimulate the economy, should be enough to convince the Fed that it needs a framework. And it shouldn’t worry about what investors say about this regardless of how many zeros are in their bank accounts. The Fed, after all, is supposed to be independent.

But maybe the best reason to be against this tax cut is that it’s probably illegal. The George H.W. Bush administration, at least, concluded that the Treasury Department doesn’t have the authority to make this kind of change on its own. Congress needs to do it. That pesky Constitution and all.

It’s an odd sort of populism that would circumvent the people to give the rich another big, fat tax cut. The kind that only makes sense from someone who calls himself a blue-collar billionaire.