Last summer, The New York Times reported that the Trump administration was considering using executive authority to deliver what amounts to an across-the-board tax cut for the wealthy.
Specifically, the plan involved Trump bypassing Congress to deliver a $100 billion windfall for the rich by indexing capital gains to inflation.
As we said unequivocally at the time, the plan, were the White House to go ahead with it, would be a flagrant slap in the face to the very same everyday Americans Trump claims to represent and who came out to vote for his populist agenda in droves in 2016.
A month later, in an interview with Bloomberg, Trump confirmed that he was, in fact, pondering the legally dubious maneuver. Not to put too fine a point on it, but it almost sounded like he was trolling the poor. “I’m thinking about it”, the president said. “There a lot of people that love it, there are a lot of people that don’t”, he continued, adding that “it’s a stimulus”.
No, it’s not. It’s a handout to the wealthy, just like his tax package. The only thing it would “stimulate” is purchases of fine art, jewelry and yachts.
The fact that the administration was considering going around Congress was just insult to injury.
Fast forward to this summer and, according to the ubiquitous “people familiar with the matter”, Trump is now actively working on the plan again and, as tipped a year ago, it could be orchestrated in a way that bypasses lawmakers.
“Consensus is growing among White House officials to advance the proposal soon to ensure the benefit takes effect before President Trump faces re-election in 2020”, Bloomberg reports, adding that “most of the benefits would 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”. (For those who need a refresher, that Wharton model can be found copied below this post.)
It is almost impossible to overstate how egregious this is. You cannot consider it in isolation. Rather, you have to think about it in the context of the Trump tax overhaul and then, on top of that, in the context of what that tax bill did to incentivize stock buybacks.
Remember, by 2027, households bringing in more than $1 million (the top 0.6% of filers) will be getting 81.8% of the benefits from the GOP tax bill. By some accounts, Trump and his family will benefit from the tax plan to the tune of more than $1 billion – that’s “billion” with a “b”.
The tax cuts also boosted corporate profitability and unleashed yet another wave of buybacks, which in turn helped drive up stock prices. If that’s too strong, then let’s just say that buybacks were a source of real-life “plunge protection” last year during some of the more harrowing bouts of selling. Buybacks are the largest source of US equity demand – and it’s not even close.
Of course, the benefits from rising stock prices do not accrue in a linear fashion. Rather, they accrue exponentially. And when it comes to the concentration of these assets, the juxtaposition is incredibly stark:
See how this works? Tax cuts beget stock buybacks, stock buybacks beget higher stock prices and because the top 1% of households own the stocks, what you end up with is a multiplier effect.
The only thing missing in this equation was a way for wealthy individuals and families to avoid paying a bunch of capital gains taxes. Until now – it was missing until now.
“The change in capital gains tax calculation would have little chance of passing Congress, which is why the White House is considering making the change on its own”, Bloomberg goes on to detail.
Despite a reluctant Treasury department, and despite historical precedent which argues against the move (George Bush considered using executive authority to do something similar, but ultimately scrapped the idea in 1992, because, to quote the Times, “the Treasury Department determined that redefining ‘cost’ by regulatory fiat would be illegal”), Trump is determined to do it anyway. “Trump has told confidants recently that he remains deeply invested in making the change”, Bloomberg says.
Almost invariably, the Department of Justice will be called upon to justify this by penning a legal opinion. Just like William Barr has acquiesced to those requests on a number of occasions recently, the DoJ will likely be more than happy to oblige Trump.
Supporters of this move include, of course, Larry Kudlow and Stephen Moore, who, in addition to claiming this would be “a giant economic stimulus for the economy”, played down the idea that it’s a tax cut for the wealthy. Again, it unequivocally is a tax cut for the rich, but reality, numbers, math and facts are not things that Stephen Moore cares about.
Amusingly, Moore’s excuse for why this isn’t clearly designed to be a handout to the wealthy is that “most Americans own stock” (that’s Bloomberg paraphrasing Stephen).
But, according to a 2015 report from the GAO, only around 14% of workers in the lowest income quartile participated in a workplace retirement savings program, compared to 57% and 76% of those in the third and fourth income quartiles, respectively.
Consider that, and then consider the following handy charts and facts from Credit Suisse:
Only higher net worth households tend to own appreciating financial assets. Figure 10 shows the share of families at different net worth quantiles which own equities (either directly or through mutual funds).
Above the 90th percentile of net worth, around 70% of families had some equity exposure, but for households between the 50th and 75th percentile, the share of equity ownership was below 20% in 2016. Ownership went down for all groups after the crisis, but again the decline is most noticeable for less-wealthy households.
In short, Stephen Moore is being disingenuous at best. At worst, he’s outright lying. Rising stock prices disproportionately benefit the wealthy, a statement so self-evident that it feels strange having to make it.
And even if you were inclined to give Moore the benefit of the doubt (which you shouldn’t, because doing so is a good way to find yourself having to ban him from your newspaper for telling lies), Bloomberg notes that “those who save in Roth IRAs or 401(k) retirement accounts wouldn’t benefit from indexing because of the way the accounts are taxed, omitting many middle-class Americans from the savings the tax break generates”.
Any questions? I hope not.
The bottom line is that if Trump goes ahead with this, it will amount to the placing of the final cog in what will be, essentially, a perpetual motion machine for inequality creation. Assuming Trump succeeds in badgering the Fed to cut rates and restart QE to the benefit of financial assets, that machine will be turbocharged.
So, middle- and lower-income Americans, consider yourself spat upon by this administration. Of course, you’re used to that by now, right?
We estimate that such a policy would reduce individual tax revenues by $102 billion during the next decade, from 2018 – 2027. This estimate is likely a lower-bound cost estimate since we use conservative assumptions when imputing asset basis year.
Because income from capital gains is concentrated among high-income households, the benefits of this change would accrue primarily to the upper end of the income distribution. Table 1 shows that the top one percent of tax units would receive more than 86 percent of the tax cut, and that after tax-incomes would increase most for the top 0.1 percent. Overall, the policy, however, would not meaningfully change the distribution of tax burden.
|AGI percentile||Share of tax cut received||Percent change in after tax income||Share of federal tax burden|
|Current law||Tax cut|