Trump Decides Against New Capital Gains Tax Cut

Topline: Facing backlash, President Trump recently decided against ordering a capital gains tax cut as he looks to cement his position—and that of the economy—before his bid for re-election.

• On Wednesday, President Trump told economic policymakers that he has for the time being ruled out using executive authority to cut capital gains taxes by indexing them to inflation, The Wall Street Journal first reported.
• There has long been debate within the Trump administration over such a proposal, which is aimed at reducing the taxes investors pay on profits they earn from selling assets like stocks or bonds. 
• Such a plan, although supported by some conservative groups and Republican lawmakers, would likely have a tough time getting through Congress due to steadfast Democratic opposition.
• Critics of the proposal have highlighted outside analyses like the Penn Wharton Budget Model, which shows that the vast majority of benefits—more than 86%, according to the report—would disproportionately go to the top 1% of taxpayers, while just 2.5% would go to the bottom 90% of Americans.
• Last month, Trump said that such a plan could be considered, before reversing course and saying that it would be perceived as elitist.

Key Background: The president and his administration have consistently looked to tax cuts as a means for boosting the country’s economic growth. Despite Trump’s claims to the contrary, his signature piece of legislation so far, the 2017 Republican tax cuts, has only accounted for a fraction of U.S. GDP so far, the Congressional Research Service said in March. With such a great deal of ongoing uncertainty in the markets—ranging from the trade dispute with China to the Federal Reserve’s monetary policy—presiding over a strong economy will be a top priority for Trump, especially as he sets out on the 2020 campaign trail. 

Crucial Quote: Forty-two Senate Democrats even wrote to Treasury Secretary Steven Mnuchin last month, asking him not implement the capital gains tax cut: “This unilateral move would almost exclusively benefit the wealthiest Americans, add to the ballooning federal deficit, further complicate the tax code, and ignore longstanding Justice Department policy.”

Further Reading: Under the current law, investors pay taxes on their nominal capital gains—which doesn’t account for some of that gain being due to inflation. Allowing taxpayers to adjust cost basis for inflation would encourage more sales of long-term assets, but would also reduce taxes by approximately $100 billion over the next decade, according to the Penn Wharton Budget Model.