President Donald Trump is reportedly going to attempt to implement a second major tax cut, after the $1.5 trillion behemoth he passed last year — this time without the inconvenience of having to get congressional approval first.
The tax cut, which would amount to roughly $100 billion and primarily benefit the wealthy, was first publicly floated as a policy option by Secretary of the Treasury Steven Mnuchin during a Group of 20 summit meeting in Argentina earlier this month, according to The New York Times. Specifically, he told the Times gathered at the event that he wanted the Department of Treasury to determine whether they had the authority to change the definition of "cost" to account for "calculating capital gains, allowing taxpayers to adjust the initial value of an asset, such as a home or a share of stock, for inflation when it sells."
The status quo is for capital gains taxes to be levied based on the difference between an asset's original price and the price at which it was sold; that amount will then, unadjusted for inflation, be taxed at a rate that is usually around 20 percent. If inflation was taken into account, however, the amount paid in capital gains taxes would inevitably decrease as investors could reduce the quantity of what could be taxed by increasing the number to be subtracted from the price at which the item in question was sold.
That said, given that the tax cuts passed by Trump and the Republican-controlled Congress at the beginning of the year has not been the political boon that many conservatives insisted it would be, passing a $100 billion capital gains tax reduction (the amount determined by the Penn Wharton budget model) would be a difficult feat in the current Congress. This is where Mnuchin's Treasury Department comes into the picture.
"If it can’t get done through a legislation process, we will look at what tools at Treasury we have to do it on our own and we’ll consider that. We are studying that internally, and we are also studying the economic costs and the impact on growth," Mnuchin told the reporters in Argentina.
As Senate Minority Leader Chuck Schumer, a Democrat from New York, quickly pointed out, Mnuchin's plan may not be legal — and it certainly does not send the right political message.
"At a time when the deficit is out of control, wages are flat and the wealthiest are doing better than ever, to give the top 1 percent another advantage is an outrage and shows the Republicans’ true colors. Furthermore, Mr. Mnuchin thinks he can do it on his own, but everyone knows this must be done by legislation," Schumer said in a statement on Tuesday.
From a political perspective, one of the most controversial aspects of Mnuchin's plan is that it will almost entirely benefit the absolute wealthiest Americans. As the Times pointed out, independent analyses indicate that the financial rewards for indexing capital gains for inflation would primarily go to the top 10 percent of income earner in the United States — 97 percent, that is. Indeed, nearly two-thirds of the financial rewards would go to the top 0.1 percent of American income earners. A report by CNN elaborated on this:
The sale of stock that would otherwise not take place would lead to some increase in tax collections should indexing be put in place. But even with those additional sales, the net effect of indexing would be a $102 billion reduction in tax collections over a 10-year period, according to a study at the University of Pennsylvania Wharton School of Business.
That study estimated that 86% of that benefit would go to the nation's wealthiest 1%, with more than 60% going to the top one-tenth of 1%.
Households with income of more than $500,000 a year are in the top 1%, according to the IRS.
In addition, Mnuchin's attempt to implement a $100 billion tax cut without congressional approval is bound to be controversial, if for no other reason than a previous Republican president balked at doing so precisely because it could be perceived as an overreach of authority. When President George H. W. Bush rejected the idea of cutting capital gains taxes in this way in 1992, it was because the Department of Treasury decided that it didn't have the authority do implement such a policy without congressional approval.
CNN once again fleshed out the story of why the Bush administration dared not venture into the territory now being considered by Trump and company:
But in 1992 the Treasury Department under Republican President George H.W. Bush looked at whether they had the power to index capital gains and decided it would take Congressional action to make the change. Although such legislation would have substantial support among Congressional Republicans, including by Kevin Brady, chairman of the House Ways and Means committee which writes tax bills, passing such a change through Congress could be extremely difficult since Democrats have enough seats in the Senate to block such a move.
According to a Quinnipiac University poll taken last month, 46 percent of voters disapprove of Trump's tax law from last year, with only 39 percent approving of it and 15 percent being unsure. Although 78 percent of Republican voters approved of the law, that number dropped to a measly 6 percent for Democrats and 39 percent for independents; by contrast, while only 9 percent of Republicans disapproved of the tax cuts, 82 percent of Democrats and 45 percent of independent felt that way about the law.
A CNBC All-America Economic Survey found that, among 800 adults who were asked whether they were currently employed, only 60 percent said yes and 38 percent said no. Among those who self-identified as employed, 49 percent said that they did not have more take-home pay due to lower federal taxes, while 34 percent said they do not take home more money.