This has not been an easy year for most of America. The coronavirus disease 2019 (COVID-19) pandemic has disrupted the U.S. economy more so than any other event in generations. The unemployment rate has soared to levels that haven't been consistently seen since the 1930s, with second-quarter gross domestic product contracting 9.5% quarter over quarter. This is, by far, the most severe economic contraction in history.
This immense economic toll is what encouraged Congress to pass and President Trump to sign the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law on March 27. At a price tag of $2.2 trillion, the CARES Act is the most expensive piece of relief legislation ever signed into law.
Aside from providing financial assistance to distressed industries, small businesses, and the unemployed, the CARES Act diverted $300 billion toward direct stimulus payments. In total, approximately 160 million Americans received an Economic Impact Payment, with these stimulus funds topping out at $1,200 for individuals and $2,400 for couples filing jointly.
However, this isn't the only financial relief that Capitol Hill, or more specifically President Donald Trump, wants to provide.
Donald Trump wants to give you a tax break
In recent weeks, the president has made numerous passing comments (i.e., nothing has been concretely proposed as a bill) that he and his administration are looking at various ways to reduce taxes on Americans. Let's face it, no one likes paying their taxes -- and Trump wants to cater to this dislike of taxation just months before the November election.
Trump and his administration are currently looking at three separate forms of tax cuts.
Payroll tax deferral or permanent cut
Folks are probably most familiar with the president's push to temporarily defer payroll taxes for the remainder of 2020 beginning in September.
Most working Americans pay a 15.3% payroll tax on their earned income, with 12.4% of that funding Social Security and 2.9% headed to Medicare. If Trump were to effectively suspend the payroll tax, workers who pay into these programs via Federal Insurance Contributions Act (FICA) taxes would see their take-home paychecks increase.
In a series of executive orders issued on Saturday, Aug. 8, Trump called for a deferral of payroll taxes, not an outright reduction. This would mean that workers paying FICA taxes would be required to make up what was deferred in 2021.
For what it's worth, President Trump has also commented that he'd like to pursue the complete elimination of payroll taxes next year. However, a high-ranking White House official told Fox News this past week that despite the president's desire, a permanent cut is not on the table.
Middle-class tax cuts
In addition to passing the Tax Cuts and Jobs Act (TCJA) in December 2017, which is arguably the hallmark legislation of the Trump presidency, White House economic advisor Larry Kudlow told Fox Business Network earlier this week that the Trump administration is also looking into income tax cuts for the middle class.
Although Kudlow didn't elaborate on what sort of cuts this might entail, it should be noted that the Trump administration was floating the idea of a 10% tax cut for middle-income Americans in mid-February, right before the novel coronavirus slammed the U.S.
When the TCJA was signed into law in late 2017, it lowered effective federal tax rates assigned to an income bracket, and/or widened the amount of income associated with a specific tax rate. Most middle-class workers should have seen a reduction in their taxable income, although many didn't realize adjustments needed to be made on their Form W-4 with their employer.
An inflation-based reduction of capital gains taxes
Thirdly, Trump and his team are floating the idea of a reduction in capital gains tax, which is the tax folks pay when selling an asset for a profit.
One idea would be a straight reduction of long-term capital gains tax rates, which currently chime in at 0% ($0 to $40,000 in taxable income), 15% ($40,001 to $441,450), and 20% ($441,451 or more) in the 2020 tax year for single filers. Trump firmly believes that the 20% long-term capital gains tax rate can be reduced to 15%, and that doing so will spur economic growth.
Also, don't forget that the Net Investment Income Tax, which is one of many regulations introduced via the Affordable Care Act, adds a 3.8% surtax to the capital gains of individuals and couples with taxable income above $200,000 and $250,000, respectively.
Beyond simply slashing the peak capital gains rate, the Trump administration is considering indexing long-term gains for inflation. This is to say that if a $1,000 initial investment were sold for $2,000 after 10 years, and inflation totaled 30% over this decade, the seller would only owe tax on $700 in capital gains rather than $1,000 since inflation would alter the original cost basis.
Trump's proposed tax breaks have a number of built-in flaws
While Trump is adamant that additional tax cuts are the best way to tackle historically weak economic growth, none of these proposals will find much of a runway on Capitol Hill.
For example, deferring payroll taxes could wind up further crippling Social Security, which is already facing an estimated $16.8 trillion funding shortfall between 2035 and 2094. The 12.4% payroll tax was responsible for $944.5 billion (89%) of the $1.06 trillion in income Social Security collected in 2019. Even deferring a few months of revenue could bring Social Security and its more than 64 million beneficiaries that much closer to across-the-board benefit cuts.
The push to cut capital gains taxes will also certainly come under fire. Since the cut is specifically designed for upper-income earners, middle- and lower-income individuals would see virtually no benefit.
But the biggest issue of all is that Trump can't unilaterally make these changes without the help of Congress. It looks highly unlikely that Democrats in the House or Senate would be willing to go along with another round of tax cuts. This effectively dooms any of Trump's proposed tax breaks before they're even officially put on paper.