As August ended and markets faltered, President Trump vowed that if he’s reelected with a GOP Congress, he will pass major middle-class tax cuts. But with signs of a recession that could heave him from office, Trump and his advisers don’t want to wait.
The problem: Democrats hold the House and bipartisan achievements are few, likely scuttling White House musings about a broad payroll tax cut or legislation giving taxpayers a rebate to offset Trump’s trade war with China.
Instead, many Trump advisers are coalescing behind a long-fantasized reform: indexing capital gains to account for inflation, which can arguably be done without Congress. Advocates say it would ignite the economy and catapult Trump to a second term.
But Trump has publicly recognized the drawback: He would be perceived as helping the rich, who would benefit most. Owners of investments such as real estate and stocks would realize tax savings as inflation cut into their recorded gains.
The longest-term property owners would benefit most. For example, an item that cost $1 in 1979 — the year Trump Tower in New York was built — is now worth about $3.53 due to inflation. If Trump were to sell his landholdings, he could save millions.
But supporters say a focus on the rich is misplaced. Grover Norquist, president of Americans for Tax Reform, noted that more than half of Americans own stocks. Nearly two-thirds of homes are owner-occupied. And he said although the rich own more property, indexing would spur a massive amount of economic activity.
“The challenge is, it’s like talking to people who are colorblind. There are people who see it and there are people who can’t see it at all,” said Norquist. He said administrative action is needed because House Speaker Nancy Pelosi won’t want to give Trump a victory on the economy before the election.
Norquist imagines ordinary homeowners evangelizing to their friends after saving money. “This is one of those things where you do it — you pull the trigger — and everyone goes, ‘Oh my goodness, look at what happened,’” he said.
Norquist said an increase in transactions would bring a “tsunami of revenue” to the government, despite lower tax rates.
Indexing is favored by key figures in the Trump administration, including Vice President Mike Pence, top White House economist Larry Kudlow, and Russ Vought, the acting director of the Office of Management and Budget.
Although Trump has told reporters he was concerned the reform was “elitist,” he later tweeted a pro-indexing op-ed written by Sen. Ted Cruz of Texas and Norquist. “An idea liked by many?” Trump wrote.
Norquist urged Trump to make the decision as soon as possible. He expressed confidence that a 1992 Justice Department legal opinion saying the reform cannot be made by fiat was outweighed by recent Supreme Court rulings expanding deference to agency decision-making.
A senior administration official said officials at the Treasury Department, the Council of Economic Advisers, and the OMB are studying the plan, including a look at its benefit distribution.
Economists aren’t united behind the idea, however.
Leonard Burman, co-founder of the Tax Policy Center, pointed to an analysis showing that in 2018, people with annual incomes of more than $1 million pay more than three-fourths of all capital gains tax.
“If you give big tax cuts to rich people, they will just save it. It’s not going to increase overall investment because investment depends on interest rates, which are already very low,” Burman said. “It doesn’t boost investment, it doesn’t boost consumption, so therefore it’s not a very good economic stimulus.”
Burman said he’s skeptical of another idea that has intrigued the White House: the rebating of China tariff proceeds, which Sen. Rick Scott of Florida intends to propose as legislation.
“If this recession is happening, it might be in part because of the trade war, which just about every economist will tell you isn’t good for the economy,” Burman said. “The combination of tariffs and a rebate are still a negative for the economy … If our partners are trading less, the world is poorer overall, and that doesn’t show up in tariff revenues.”
“The better thing to do would be to just call off the trade war,” Burman said.
