President Trump’s recent suggestion of zeroing out the capital gains tax to lift the economy out of crisis was met with a tepid response by some policy observers.
The president has suggested for weeks that he would like to see a capital gains tax cut in response to the economic crisis resulting from COVID-19, along with a temporary payroll tax cut. During a May 8 news conference at the White House with Republican members of Congress, Trump said he favors getting rid of the capital gains tax altogether.
“Some people would say that a capital gains stoppage — cutting capital gains, getting rid of capital gains tax . . . would be a great thing,” Trump said.
Erica D. York of the Tax Foundation isn’t one of those people. “The short answer is no, a capital gains tax cut or elimination is not well suited for the current situation,” she told Tax Notes.
Cutting or eliminating capital gains taxes might stimulate a modest boost in saving, but a lack of saving isn’t the source of the economy’s woes, York explained. A more productive tax policy change would be to consider full expensing and a neutral cost recovery system to spur investment, she added.
Steve Wamhoff of the Institute on Taxation and Economic Policy is similarly unimpressed with Trump’s pitch regarding capital gains, which he said are already undertaxed.
“It’s really hard to see how providing even more cuts for capital gains rates would have any beneficial effect,” Wamhoff said. Cutting capital gains tax rates would mostly benefit the wealthiest taxpayers and primarily serve to reward investment that has already happened, he argued.
Further, trying to boost investment isn’t the right cure for the economy, according to Wamhoff. Even before the pandemic, companies were doing stock buybacks because there weren’t enough opportunities for investment, “which really means there aren’t enough customers,” he said. The economic focus right now should be on boosting demand by boosting the incomes of ordinary people so they want to buy things from stores and restaurants, he said.
Wamhoff also questioned how eliminating capital gains taxes or even just cutting rates would mesh with the White House’s earlier pandemic relief provisions. The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) featured tax provisions that loosened the rules on business losses, so if a taxpayer invests in a business, they might claim deductions for the losses. But if capital gains taxes are eliminated, they would also never pay taxes on the profits.
“That’s crazy. That’s not the way our tax system works,” Wamhoff remarked. “What is the game plan here?”
‘Music to Their Ears’
At the news conference, Trump said that for “true conservative Republicans,” the prospect of eliminating or cutting capital gains taxes would be “music to their ears.”
That much is true for Ryan Ellis, a Republican tax lobbyist and director of the Center for a Free Economy, who argued that there’s no such thing as a bad time to cut capital gains taxes.
“I don't understand opposition to the concept,” Ellis told Tax Notes. “If we want to get the economy going again, we should not be saying no to any pro-growth tax ideas,” he added, saying that he’d equally support efforts to increase full expensing for businesses or lower marginal tax rates on individual or business income.
Ellis said he views capital gains tax relief much the same as he views the CARES Act and the Federal Reserve’s actions: taking any and all steps to generate economic activity, especially in ways that support the investment and the flow of capital.
“So it’s a good time to do it for sure,” Ellis said.
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