An economics columnist explains how the GOP's new plan could 'permanently hobble' the federal government

An economics columnist explains how the GOP's new plan could 'permanently hobble' the federal government
President Donald J. Trump, joined by Vice President Mike Pence, Secretary of the Treasury Steven Mnuchin, United States Trade Representative Ambassador Robert Lighthizer and Chinese Vice Premier Liu He, delivers remarks prior the signing ceremony of the U.S. China Phase One Trade Agreement Wednesday, Jan. 15, 2020, in the East Room of the White House. (Official White House Photo by Tia Dufour)

Some Republicans, including President Donald Trump and White House Senior Adviser Kevin Hassett, have recently proposed a holiday on capital gains taxes — which, they claim, would stimulate the U.S. economy. But economics columnist Catherine Rampell, in a new Washington Post piece, explains why such a tax cut could hurt the U.S. economically in the longrun and saddle future presidents with staggering federal deficits.

“A one-time, temporary capital gains tax holiday would do little to stimulate the economy, even according to the GOP’s usual line that tax cuts goose growth,” Rampell asserts. “The move could, on the other hand, permanently hobble the ability of future presidents to fund the government.”

Many Americans don’t pay capital gains taxes because they aren’t in the stock market and don’t own shares of any stocks or mutual funds.

“A ‘capital gain’ refers to how much the value of an asset such as a stock has increased over time,” Rampell explains. “Taxes on capital gains are triggered only when the asset is sold. So, if you bought a few shares of Apple stock when it IPO’d in 1980, your shares would be worth a fortune today — but you don’t owe Uncle Sam a penny until you cash out. And perhaps not even then.”

According to Rampell, the type of “holiday” Hassett has proposed would allow the wealthiest of Americans to “cash out” without paying a cent in capital gains taxes.

“A one-time, temporary capital gains holiday would only reward past investment decisions,” Rampell emphasizes. “It would not actually increase incentives to make new investments. Sure, the lucky guy who bought Apple stock in 1980 can now cash out tax-free. But the policy would do little to change future investment decisions and increase capital accumulation. It’s also unlikely to produce much in the way of a Keynesian-style, demand-side stimulus, because the high-income households disproportionately reaping the benefits are more likely to save their windfalls rather than spend them.”

But what a capital gains holiday would do, Rampell adds, is “make budgeting more difficult for whoever’s in the White House when the holiday ends.”

“Anyone with any unrealized gains today would use the holiday to sell and book those gains now, tax-free, thereby denying the government the ability to ever collect revenue on them,” Rampell notes. “You can’t unring the bell. Absent some sort of — possibly unconstitutional — wealth tax, the holiday would deprive the (U.S.) Treasury of taxes on the past 50 years or so of accumulated, unrealized capital gains. This would permanently increase deficits, which in the longrun, would drag economic growth.”

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