Trump Thinks Tax Cuts in Second Stimulus Package Will Provide a Path to Economic Recovery—Experts Disagree

Lawmakers returning this week will haggle over the successor to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), amid creative tension between more bailout money versus tax cuts, or how both can be accommodated.

President Donald Trump is pushing for tax cuts for businesses and investors. Under consideration are measures such as cutting the capital gains tax rate and letting companies deduct the full costs of investments, according to The New York Times, citing anonymous White House administration officials and outside experts.

The proposals are only in the discussion phase, the paper reported, but do come amid Trump's priorities for the next government rescue measures to include suspending payroll taxes for workers. The president also wants to increase the scope for deductions for corporate spending and introduce liability shields for businesses looking to reopen.

Trump tweeted on Tuesday his wish to cut capital gains taxes and he attacked the push by the Democrats to provide state governments and cities more money.

His comment that "well run states should not be bailing out poorly run states," suggested, as the president's informal adviser Stephen Moore told the Times, "no more spending' has really become the rallying cry of the right."

Steven Hamilton, an economics professor at George Washington University, Washington DC, said that as long uncertainty caused by the virus remains, firms will be hampered in what investment they can make and would be better served if the government focused on getting the virus under control by expanding coronavirus testing.

"Rolling out investment tax incentives right now is a bit like starting the patient on physical therapy while they're still bleeding out on the operating table," he told Newsweek.

He believes that the next stimulus package should look at extending beyond eight weeks the Paycheck Protection Program (PPP) which provides forgivable loans to struggling small businesses to keep their staff on the payroll. It should also cover more expenses and not just wages.

He said that an employee-side payroll tax cut "is a very blunt tool" to help workers and support, perhaps via an employer-side payroll tax cut, could also be extended to mid-size firms, which could encourage them to hire more workers.

Cuts to capital gains tax are of most help to individual and institutional investors who sell stock for a profit, but would be unlikely to help blue-collar and low income workers who have been hit hardest by the coronavirus shutdown.

Hamilton said that with interest rates at record lows, there is no shortage of capital to support business investment, meaning any cuts to the capital gains tax rate "would have only a limited effect on investment right now and would simply be a windfall to investors."

Stephen Wu, professor of economics, at Hamilton College, Clinton, New York, does not think proposed tax cuts and incentives for new investment are the most effective ways to help people and small businesses.

"While long term economic growth is an admirable goal in normal times, our current situation is far from normal, and the government should really be in more of a 'rescue' mode," he told Newsweek.

"Owners of small businesses who have seen their revenues plummet would have little reason to contemplate investing to expand their operations at this time or to be engaging in much corporate spending on meals and entertainment.

"Instead, it may be the larger retailers, some of which have done quite well during the current health crisis, that would be in the best position to benefit from these tax cuts," he added.

Richard Grossman, professor and chair of the department of economics at Wesleyan University, Connecticut, said that the Trump Administration might be considering a shift away from spending towards tax cuts, as a way of trying to stimulate the economy without micromanaging it, especially with the public relations disaster of PPP loans going to big companies like Shake Shack and the Los Angeles Lakers.

"That said, tax cuts help those who pay taxes. And it is true that those who pay taxes—both businesses and individuals—are suffering from the COVID-19 crisis. Small businesses and lower-paid workers are in more immediate need of help and less likely to get a boost from a tax cut," he told Newsweek.

"Cutting the capital gains tax and expanding business deductions for meals, entertainment, and sporting events will not do much to remedy their problems."

Deductions for businesses

Trump's advisers are also looking to make permanent a provision of the president's tax overhaul in 2017 which lets businesses immediately deduct the full cost of their investments in equipment and other relatively short-lived assets, the New York Times reported.

However, Derek Klock, finance professor at Virginia Tech said that this would only create a backlog of inventory.

"This is a demand-side recession. Investment is great, but to invest in what? No one can go out to buy goods, no one can engage in services. This isn't a typical recession where we need to stimulate business spending. This is a near complete global loss of demand," he told Newsweek.

Klock also believes that suspending payroll taxes, as Trump proposes, would only help the smallest businesses and not help those who have lost their jobs. "So it would give workers that are already fairing pretty well a raise, but the hardest hit wouldn't receive any benefit."

He said that the best step in any stimulus package which would help those in need would be to suspend income tax on unemployment benefits to make sure that everyone who has lost their job gets to keep all their money.

Congressional Democrats oppose Trump's plans as they push for increased support for those 30 million Americans who have lost their jobs. They are likely to want greater support for states that never would have predicted when setting up the schemes, that nearly a third of workers would be collecting benefits.

There is also a loss of enthusiasm among some lawmakers for PPP.

A study released this week by the Federal Reserve Bank of New York has shown that small businesses hardest hit by the coronavirus have not been able to secure loans through the PPP, with most funds going to central and midwestern states that have reported the fewest number of coronavirus cases.

Klock said helping small businesses is key to any future support package and that he thought the problem with the first version of the PPP was the limits on employees.

"I understand the need to get the money out quickly, but this has missed the most vulnerable employers twice.

"To really help them suspend employer payroll taxes for the remainder of 2020 and rebate the taxes already paid in 2020 for all employers with less than 50 employees—no strings attached."

The infographic below, provided by Statista, shows confirmed COVID-19 cases throughout the U.S. as of May 6.