President Donald Trump is tapping his presidential authority to make tax changes that Congress is refusing to do, but his limited power means he could end up over-promising and under-delivering on his pledge to slash IRS bills.
Trump has given employers the option to defer hundreds of billions of dollars worth of payroll tax levies and is contemplating another executive action that would amount to a roughly $100 billion capital gains tax cut for investors by changing Treasury Department guidelines.
The president is running for re-election in November trailing Democrat Joe Biden in every recent poll. Meanwhile, Congress is deadlocked on another broad stimulus as the country continues to struggle under a still-raging coronavirus pandemic. There are no immediate prospects for more negotiations and the stalemate could drag into September, leaving the economy limping as voters are getting ready to make their choices.
With a recovery key to Trump winning a second term, actions are aimed at giving a lift to both his working-class base and financial markets. But the tactic comes with a significant amount of political risk.
Those payroll tax payments will still come due unless Congress decides to forgive the amounts, which is no sure bet. Both Republican and Democratic leaders aren’t enthusiastic about slashing the levies that finance Social Security and Medicare.
The president’s plan to cut capital gains taxes would involve executive action that some conservatives think may overstep his authority and end up in court. And the benefits, if they were to be realized, would be heavily tilted to the wealthy, giving Democrats another opportunity to attack Trump as favoring the rich at the expense of the middle class.
“With payroll taxes, administratively there is no way to make it work perfectly without Congress,” Kyle Pomerleau, a resident fellow at the American Enterprise Institute, said. “With capital gains, it could get tied up in the courts and it just never happens.”
Treasury Secretary Steven Mnuchin on Wednesday indicated at least some in the administration are aware of the pitfalls.
“The president would like to do capital gains tax cuts, and we do need legislation to do what we want on that front,” he said on Fox Business.
Market Reaction
With congressional talks at an impasse on another round of stimulus that economists, Federal Reserve officials and market participants all see as essential, Trump unilaterally extended extra unemployment aid and deferred payroll tax payments. When that failed to prod a resumption of talks, and analysts assessed its impact as limited, the S&P 500 turned sharply lower in the final hour of trading on Tuesday -- though the index rebounded Wednesday.
Some companies are waiting for guidance before deciding whether to take the risk of getting saddled with bills at the end of the year.
White House economic adviser Larry Kudlow told reporters Tuesday that companies and employees “trust the president” that the the tax bills would be forgiven.