The U.S. economy is strong in many ways — inflation and unemployment are both extremely low — but also has some deeper problems, such as wages growing too slowly, the unfolding “retail apocalypse,” uncertainty about health coverage, persistent poverty and the inability of people without college degrees to get well-paid jobs with good benefits.
The Trump administration, faced with this troubling reality, is ready to act. How is it going to secure Americans’ long-term prosperity?
By cutting the capital gains tax. No, I’m not joking.
Either this is a suicidal plan to write Elizabeth Warren’s campaign ads for her, or they think they can get away with it because with enough race-baiting, nobody will care what the administration actually does on taxes. The latter seems more likely.
To be somewhat more serious about it, there’s both an economic theory and a political theory underlying this move. The first is, though empirically wrong, extremely pleasing to conservatives. The second could be right but probably won’t be.
Let’s start with what the administration is considering. You pay capital gains taxes when, for instance, you sell a stock that has appreciated in value; if you bought a share of WidgetCo 20 years ago at $50 and sold it today for $90, you’d pay taxes on the $40 you made. But because the tax code is written to benefit the wealthy, capital gains rates are lower than regular income tax rates; they top out at 20 percent, compared with 37 percent for income taxes.
Let us pause to note that the very idea that money you make when your money makes you more money should be taxed at a lower rate than money you make from working is fundamentally perverse. Which is why all income, no matter its source, should be taxed at the same rates (but that’s a discussion for another day).
This week, 21 Republican senators led by Ted Cruz signed a letter urging the administration to unilaterally declare that capital gains taxes will now be indexed to inflation. So because the $50 you spent on the WidgetCo share 20 years ago would today be worth $77, you would have to pay taxes on only the $13 difference between $90 and $77, not the $40 difference between $90 and $50.
Making this change could open up a whole new arena for gaming the tax system. According to one analysis, not only would it cost the Treasury Department at least $100 billion over 10 years, 63 percent of the benefits of the change would go to just the wealthiest one-tenth of 1 percent of Americans. After all, they’re the ones who have all the capital to gain from.
The administration is apparently divided over the idea: On one side are officials who note that a Treasury Department legal opinion from 1992 states that such a change would require legislation and can’t just be done on the president’s say-so. On the other side are officials led by chief economic adviser Larry Kudlow, who think giving tax breaks to rich people is awesome.
Or more specifically, they believe that when the government showers the wealthy with tax benefits, those noble and virtuous job creators will sprinkle their largesse down upon the rest of us. Eventually.
This is the theory underlying every Republican tax cut, including the one Republicans passed in 2017. Strangely enough, that tax cut, which gave most of its benefits to the wealthy and corporations (who used their windfall for a record level of stock buybacks), has turned out to be consistently unpopular. It’s almost as if the public never bought what Republicans were selling on taxes, and still doesn’t.
But that never stopped them, which leads to the political theory behind the potential for yet another tax break targeted to the wealthy. Republicans don’t pursue these tax cuts because they think it’ll make them more popular; they do it because they fervently believe it’s the right thing to do. Indeed, while some Republican administrations start wars and some don’t, and some wage war on immigrants and some don’t, there is one thing a Republican administration will always, always, always do: cut taxes for the wealthy.
Their theory is that it doesn’t really matter. They can have an economic agenda built on the interests of a small segment of the population, and that won’t be a risk because they can persuade the voting public to care about something else. One year it might be the threat of gay people getting married, another year it might be the threat of terrorism, and another year it might be the threat of immigrants coming to kill your women and take your job. There will always be something.
It depends, however, on Democrats being too squeamish to the GOP as the party of the rich. Which is often the case.
But the nice thing for Democrats is that Republicans give them so much ammunition that it isn’t hard at all to convince people that Republicans don’t care about the economic fortunes of ordinary people. Their big economic idea is a capital-gains tax cut? Seriously?
If Democrats can’t use that to their advantage, they ought to find a new business to be in.