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No more upper-class tax cuts
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No More Upper-Class Tax Cuts Mr. President!

No more upper-class tax cuts should be the rallying cry of the middle class.  President Donald Trump is considering a reduction in capital-gains taxes to bolster the economy.  The President’s 2017 1.5 trillion-dollar tax cuts, which went mostly to uber-rich individuals and corporations, should be evidence that tax cuts to the upper-middle class will not strengthen the economy.  Most middle-income individuals don’t own stocks.  Those who do, hold them inside their retirement accounts such as 401 (k), 403 (b) or traditional IRAs, which can’t be easily liquidated to take advantage of lower capital-gains tax.

What Is Capital Gains Tax

If you bought an asset for 50 dollars and five years later you sold it for $100, you would pay a capital gains tax on $50, which is the positive difference between the sale price of the asset and its original purchase price.

Long-Term (Assets held longer than one year)  Capital Gains Tax Brackets

  • 20% for the top tax bracket (39.6%)
  • 15% for the next four brackets (25%, 28%, 33% and 35%)
  • 0% for first and second brackets (10% and 15%)

The President and his administration are understandably worried about a potential slow down in the economy. The stock markets are up one day, and down the next, global economies are in freefall, and business investments are down. The ultimate indicate that signaled the last seven recessions is flashing red. That indicator is the yield curve, and it is now inverted meaning you can get higher interest rates now on short-term bonds than you can on long-term ones.

Mr. Trump’s Other Options

As the above texts show, the wealthiest Americans pay the highest capital gains tax. Reducing the capital gains tax will not increase consumption or business investments or both. Consumer spending and business investments are two of the four components that make up gross domestic product (GDP) with government spending and net exports being the other two.

Trade War

Both consumer and government spending were up last quarter.  The immediate and effective action the Trump administration can take right now is to recognize the impact of the trade war with China on businesses. Although consumers are still spending, companies are postponing or canceling their capital investments due to the uncertainties of that trade war.

Payroll Tax Cut

Payroll taxes, unlike federal taxes, fund Medicare and Social Security, will go straight to the pocket of the American’s middle-class.  As stated above, consumer spending is not the problem in the economy. Consumers are still spending.

Interest Rates Cut  

President Trump has been pressuring the Fed Chairman Jerome Powell to cut interest rates, which will make borrowing money cheaper.  Again, consumers are still spending, and businesses’ balance sheets look healthy. Companies are choosing to postpone or canceling capital investments due to uncertainties.  

Fiscal Policy

The Federal Reserve decides when to raise and cut Interest rates, otherwise known as monetary policy. Reducing or increasing taxes and government spending are tools available to the government to cool down or stimulate the economy. Government spending is up, and the Trump Administration had already given 1.5 trillion dollars in tax cuts that mainly went to wealthy individuals and corporations.  Those fiscal policies were implemented when the economy was strong.

 A reduction in capital-gains and payroll taxes will not bolster the economy. Businesses need to be confident about how the world is going to look at least one year from now.  Multinational corporations will continue to reduce their capital expenditures until they have that clarity.

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