Trump Would Double Down on Tax Cuts in Second Term

White House economic adviser Larry Kudlow recently floated an unspecified middle-class tax cut.

Photo: Erin Scott/Zuma Press

WASHINGTON—In a presidency full of unexpected twists, tax policy under President Trump happened by the book: Republicans got elected and Republicans cut taxes. What happens if they win again? Probably more tax cuts.

Tax cuts remain a core, unifying aspect of GOP ideology. Full Republican control of government—though unlikely—would yield attempts to forgive this year’s deferred payroll taxes, lock in tax cuts set to expire in coming years and create new breaks. Details are scant as the Trump campaign has released mostly bullet points.

In a more likely divided-government scenario, Mr. Trump’s re-election would temper Democrats’ ability to raise taxes on companies and high-income households. Lawmakers still would face the same deadlines—temporary pandemic provisions expiring soon, business-tax increases scheduled for 2022 and 2023 and expiration of individual tax cuts slated for 2026.

Lawmakers “kind of have a built-in tax policy agenda…with all the provisions that are sunsetting and sunrising,” said Ray Beeman, a former House Republican aide now at accounting firm EY LLP.

Voters will have a chance to help shape the American economy when they go to the polls in November. WSJ’s Jon Hilsenrath breaks down where President Donald Trump and Democratic presidential nominee Joe Biden stand on key economic issues. Photo Illustration: Carlos Waters/WSJ

Mr. Trump, who faces Democrat Joe Biden in the first presidential debate tonight, also has said he would cut the top capital-gains tax rate to 15% from 20%. He backs incentives to relocate production to the U.S., particularly for medical supplies needed to fight pandemics.

Beyond that, the second-term tax agenda is murky. Larry Kudlow, the top White House economic adviser, said at the Economic Club of New York this month that he could speak only “pre-decisionally” about some second-term plans, even with the election just weeks away.

Mr. Trump ran on a tax cut in 2016 and delivered. Without any Democratic votes, Congress in 2017 cut corporate, individual and estate taxes and curbed some tax breaks; the law was projected to lower revenue by $1.5 trillion over a decade.

To Republicans, that was a huge success—and they want more. Although the promised business-investment bump was relatively small and the pandemic later erased economic gains, they see the tax cut as a reason why middle-class wages rose and poverty dropped in 2018 and 2019.

The way Congress passed the tax cut forces lawmakers to revisit it, and those deadlines will shape the years ahead. The corporate tax rate cut from 35% to 21% lacks an expiration date, but other pieces lapse.

Republicans limited themselves to $1.5 trillion in net tax cuts. To keep that number down, they set expiration dates for some tax cuts and scheduled future tax increases.

Full, immediate write-offs of businesses’ capital investments start phasing out after 2022. And starting in 2022, companies must slow deductions for research costs and face tighter limits on interest deductions. Those tax increases could create pressure for Congress to delay effective dates, especially if the economy remains weak.

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Expirations of individual-tax cuts happen after 2025, making quick action less likely there as the parties jockey for electoral advantage. Democrats want to extend most of those changes, but the parties differ on tax cuts for people making more than $400,000 and the $10,000 cap on the deduction for state and local taxes that disproportionately affects high-income households in Democratic-leaning states such as New York and California.

“In normal times, it would be important to create permanence in the tax code,” said Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee. “Now that’s more important than ever. The uncertainty of the pandemic is unprecedented.”

Mr. Brady also wants to double the tax credit for business research and encourage companies to put intellectual property in the U.S.

Rep. Kevin Brady (R., Texas) wants to double the tax credit for business research and encourage companies to put intellectual property in the U.S.

Photo: Andrew Harnik/Associated Press

A spokesman for Sen. Mike Crapo of Idaho, who is in line to be the top Republican on the Senate’s tax-writing Finance Committee, declined to comment on the 2021 agenda.

Future tax cuts might have a diminishing economic effect on long-term investment because they will be seen as temporary and uncertain given the country’s long-run budget deficits, said Adam Michel, a senior policy analyst at the conservative Heritage Foundation.

“If you want to double down on even larger tax cuts, the pressure of the entitlement spending side of the equation has to come to a head at some point,” he said of the rising costs of Social Security and Medicare. “Even if you cut taxes now, businesses and investors especially are forward-looking, and they know that can’t be a permanent change.”

A second Trump term also would address leftovers from the pandemic response. Mr. Trump is encouraging employers to stop collecting the 6.2% Social Security payroll tax on many workers for the rest of 2020. Many employers haven’t done so, but the federal government has, and the president is pressing Congress to turn that tax deferral into a tax cut instead of forcing double withholding in early 2021.

Then there is a possible further, unspecified middle-class tax cut. Mr. Trump teased the idea before the 2018 elections, then stopped talking about it once Republicans lost the House of Representatives. Mr. Kudlow recently floated the idea again.

“Once the American people rehire President Trump for a second term,” said campaign adviser Steve Cortes, “we are cautiously optimistic that the present toxic tone of the House Democratic leadership could become more reasonable.”

A compromise is unlikely, said Seth Hanlon, a senior fellow at the Center for American Progress, a group aligned with Democrats.

“I can’t imagine them finding agreement on any kind of major tax reform since their agendas are close to diametrically opposed,” he said.

Write to Richard Rubin at richard.rubin@wsj.com

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