Update 455 — Welcome to Tax Day 2020:
The Cost of Fighting COVID via the Code
The Trump administration’s reflexive economic policy response to COVID — and just about everything else — has been tax cuts, breaks, deferrals, deductions, and delays. The COVID tax relief measures have gone under the radar but represent a kind of fiscal policy that is, by default, no fiscal policy at all.
Meanwhile, Trump’s tax policy has left the budget, social programs, and state and localities impoverished. We have no national infrastructure program because Trump insists on financing it entirely through tax incentives.
On Tax Day 2020, we reflect on what Trump’s tax policy has meant and what will need to be done to fix it.
COVID Tax Relief
Before the pandemic, President Trump’s main fiscal policy achievement was cutting taxes and adding $1.9 trillion to the national debt. The 2017 Tax Cuts and Jobs Act (TCJA) slashed the corporate tax rate from 35 to 21 percent, lowered the top marginal tax rate for individuals, and added several other deductions for top earners — a windfall for corporations and the wealthy.
The tax cuts were ill-timed, juicing an already growing economy. And they will not “pay for themselves,” an assertion disproven even before the pandemic began. Now, we’re left with fewer options to fund recovery efforts when relief is actually needed.
Tax relief has largely taken a backseat during this crisis to other fiscal measures such as small business lending and unemployment insurance. The most prominent tax-related provision was $1,200 economic impact payments or “recovery rebates” for tax filers making less than $75,000, estimated to cost $292 billion. Less noticed was a provision Senate Republicans snuck into CARES lifting the TCJA’s $250,000 deduction limit for pass-through entities. Per the Joint Committee on Taxation, nearly 82 percent of the beneficiaries from this change make over $1 million.
Trump’s Unwelcome Summer “Holidays”
In negotiations for the next relief package, tax credits, cuts, and holidays are all back on the table.
During the CARES Act debate, the White House floated a payroll tax cut that Congress nixed in the final package. But National Economic Council Director Larry Kudlow stated that a “payroll tax holiday” is among the White House’s priorities in the next package. This holiday would target relief to those still employed but would do nothing for the millions of unemployed Americans who face benefit cut-offs at the end of July. It would also further erode needed social security funds.
Kudlow also suggested a capital gains tax holiday. Capital gains are highly skewed toward the wealthy. Per the Tax Policy Center, in 2018, the top one percent accounted for nearly 69 percent of realized long-term capital gains. A capital gains tax holiday would almost exclusively benefit the wealthy. It could also hamper future tax revenues as the wealthy rush to realize gains during the holiday. So far, neither of Trump’s holidays have gained traction in Congress.
Any spending in the next package should do more to target low-income individuals. Further benefits for the wealthy would cut much-needed revenues and provide little return for the real economy. While these COVID-related tax provisions are temporary, November’s election may bring further long-term changes to the tax code.
Tax Day 2021
In 2017, the TCJA transformed an already skewed tax code to be even more favorable for the rich. Vice President Biden has stated his intent to “get rid of the bulk of Trump’s…tax cuts” and promises a more equitable tax system. Beyond reversing the TCJA, Biden’s tax platform goes further in instituting a progressive tax system:
- Repealing TCJA Provisions: The central piece to Biden’s repeal effort is reinstating a 39.6 percent top individual income tax rate, applied to income above $400,000. Biden would also phase out the Qualified Business Income (QBI) deduction for those same individuals.
- Social Security Tax: Biden proposes adding a 12.4 percent Social Security payroll tax on wages above $400,000. This would create a “doughnut hole” where wages between $137,700 and $400,000 avoid Social Security tax. This gap would close over time as the $137,700 adjusts with inflation.
- Long-Term Capital Gains: Under current law, the top rate for long-term capital gains is significantly lower than the top rate on personal income and short-term capital gains. Biden will raise this rate to 39.6 percent for individuals earning over $1 million. He would eliminate the ‘stepped-up basis’ loophole, which allows inheritors of property to avoid capital gains taxes on these assets upon receipt and significantly reduce their tax burden when they sell.
- Corporate Taxes: Biden will raise the corporate income tax rate from 21 to 28 percent. He also proposes a 15 percent minimum tax for corporations with over $100 million in book income. Qualifying corporations will owe the larger of their standard tax bill or the 15 percent minimum tax, which allows them to deduct net operating losses and overseas tax liabilities, effectively reversing the TCJA’s elimination of the corporate AMT.
Per the Tax Policy Center, these changes will generate $156 billion in revenue in 2021 and over $1.5 trillion through 2025.
Revenue Forecasts for Vice President Biden’s Key Tax Proposals (Billions)
|Higher Top Individual Rate||$17.4||$133.7|
|QBI Phase Out||$23.8||$201.1|
|Social Security Tax Change||$51.9||$386.8|
|Increased Capital Gains Taxes||$5.3||$188.3|
|28% Corporate Income Tax||$49.1||$552.1|
|“Corporate Minimum Tax”||$8.2||$66.4|
Source: Tax Policy Center
Room for More
Although Vice President Biden’s proposed tax reforms would create a more progressive tax code, they will do little by themselves to provide relief to low-income families most affected by the recession.
Per a National Academies report, combining a universal $2,700 annual Child Tax Credit with a 40 percent expansion of the Earned Income Tax Credit would reduce child poverty in the United States by half. This would cost around $110 billion per year. The HEROES Act would expand both credits but continues to languish in the Senate.
A Progressive Code for a Progressive Future
As negotiations begin on the next relief package, Democrats will need to hold the line against attempts to tilt the tax code further in favor of the wealthy. It might be an uphill battle as the administration believes that any problem can be solved with tax cuts. Even if voters oust Trump in November, the effects of his reckless tax policies will prove fiscally challenging for years, maybe decades. The need for sensible, progressive reforms to the tax code needs to be a top priority for the next Democratic administration.