Yesterday, when we reported that the White House denied the WaPo reported it was considering a cut in the payroll tax, we noted that it appeared to be just a trial balloon, with Trump gauging the market's response, especially since it was none other than Trump's predecessor, Obama, who cut it to 4.2% as a way to encourage more consumer spending during the recent economic downturn. But the cut was allowed to reset back up to 6.2 percent in 2013.
Well, not even 24 hours later Trump has confirmed that he was in fact looking at a payroll tax cut, and not only that, but also a capital gains tax cut (this would be far less popular with the middle class as it would mostly affect investors): "Payroll taxes, something that we think about and a lot of people would like to see that," Trump confirmed.
"We’re always looking at the capital gains tax, payroll tax," Trump told reporters in his latest lenghty presser, adding "I would love to do something on capital gains," Trump says, "We’re talking about that."
There was more.
Trump went so far as to say he can cut taxes by indexing capital gains to inflation without congressional approval, a move the White House has been considering for months and that would largely benefit the wealthy.
“We’ve been talking about indexing for a long time,” Trump told reporters at the White House on Tuesday. “And many people like indexing and it could be done very simply. It could be done directly by me.”
President Trump claims "we're very far from a recession," despite unrest on Wall Street.— ABC News Politics (@ABCPolitics) August 20, 2019
"We've been talking about indexing for a very long time ... we're always looking at the capital gains tax, payroll tax," he adds when asked about potential tax cuts https://t.co/i3AO0tFVgH pic.twitter.com/waxcaaVXWT
There is one problem for Trump: as discussed yesterday, such a tax cut would effectively confirm the economy was slowing, something that would go directly against Trump's claims of the "strongest economy ever" and his renewed claim today that "we are very far from a recession." And yet, with the 2s10s yield curve inverting last week recession odds soaring, Trump may have no choice.
Trump has recently indicated that he is concerned - tweeting about the “CRAZY INVERTED YIELD CURVE!” in reference to the 10-year Treasury bond rate dipping below the two-year Treasury bond rate for the first time in over a decade -- and seeking to reassure Americans.
Still, as Bloomberg notes, citing a report by the Tax Foundation, indexing capital gains taxes would do very little to spur economic growth. The group says the tax cut for investors would increase the size of the economy by 0.11% in the long run.
Revamping capital gains taxes through a rule or executive order likely would face legal challenges, a concern that reportedly prompted former President George H.W. Bush’s administration to drop a similar plan.
Indexing capital gains to inflation - an idea first floated two years ago - would merely cut tax bills for the wealthiest of investors who selling assets such as stock or real estate by adjusting the original purchase price so no tax is paid on appreciation tied to inflation.
As a result, the benefits would largely go to high-income households, with the top 1% receiving 86% of the benefit, according to estimates in 2018 by the Penn Wharton Budget Model. The policy could reduce tax revenue by $102 billion over a decade, the model found.
So why threaten an executive order? Simple: a change in capital gains tax would have little chance of passing a Democratically controlled House, which is why Trump is interested in making the change without legislative approval. The House would likely oppose legislation to make the change, as many Democrats have raised objections to the GOP’s 2017 tax cuts, saying they disproportionately helped the wealthy.
That said, a payroll tax may be far more likely to get bipartisan support however since it would likely result in another temporary boost to the economy, Democrats would be leery of passing it ahead of the 2020 election and