The Trump administration, thrashing around for solutions to the pandemic and recession, is falling back on the response every Republican administration has sought for four decades: giving rich people a big tax cut. The administration has already endorsed restoring the tax deduction for business meals, a tax break that allows the executive class to dine out at taxpayer expense. Jim Tankersley reports that the administration is also considering several more juicy tax cuts for the affluent: extending the full expensing of business investment, and of course a capital gains tax cut. Trump seemed to endorse the notion by tweeting his support for two of the measures.
Trump and the Republicans enacted a huge tax cut for business two years ago. At the time they promised that reducing taxes on business income would give business owners a stronger incentive to invest, thereby producing enough new economic activity that the resulting acceleration in growth would generate enough revenue to pay for itself. Business investment did not increase at all, nor did overall economic growth, and revenue from the corporate tax dropped like a stone.
One of the measures in that bill that failed to yield the promised surge in investment was a measure allowing business to expense all investments through 2022. In theory, that measure gave them an incentive to push up their investment quickly — they could enjoy a tax benefit by moving up their plans to, say, open a new factory, before the tax break expires at the end of 2022.
Now that it hasn’t worked, Trump apparently wants to make the incentive permanent. But this destroys the entire point of the incentive, which is to encourage business to invest quickly. Indeed, it would give them an incentive to delay their investment. A business might be thinking of buying some new equipment over the next couple years so it can enjoy a big write-off before the chance disappears in a couple years, but Trump’s plan would let it delay the purchase as long as it wants. He is literally proposing a new incentive for businesses to put off making new investments.
Second, Trump wants to restore the deduction for business meals as a measure to prop up the restaurant industry. It is certainly true that restaurants face an existential threat from the coronavirus. But letting executives write off the cost of meals where they “discuss business” — a notoriously lax requirement that functionally subsidies pleasure as a business cost — is unlikely to save those restaurants. How many executives are going to start crowding into restaurants just to get the sweet tax deal if they’re worried about contracting a deadly virus?
And finally, there’s the inevitable plan to cut the capital gains tax, which is the tax paid on income gained from selling assets like stock. Cutting capital gains taxes is another way to drop a windfall benefit on owners of businesses. Three-quarters of the benefit goes to people with an annual income over a million dollars. Income from capital gains is already taxed at half the level of salary income, and a large share of capital gains is never taxed at all, due to a loophole that allows stocks to be transferred to heirs tax-free.
The capital gains tax cut has been the Republican Party’s panacea for every possible set of economic circumstances. They enacted capital gains cuts as the cure for slow growth and high inflation (1978), fast growth and low inflation (1997), slow growth and low inflation (2003), and proposed more capital gains cuts on and off. It was probably inevitable that Republicans, looking around at an economy devastated by a pandemic illness, would decide that their solution to this particular problem would be their solution to every problem. And hey, if it fails — as it usually does — at least they walk away with fatter bank accounts.