Trump admin mulls tax cuts for next stimulus package

The American College of Financial Services Professor and Frank M. Engle Chair of Economic Security Michael Finke joins Yahoo Finance’s Zack Guzman to discuss expectations for the next stimulus package in Congress and outlook on retirement amid the coronavirus outbreak.

Video Transcript

ZACK GUZMAN: It is interesting is that even though the unemployment rate could reach as high as 16% this Friday, we have been hearing reassurances from Fed officials saying that that much is expected when you look at the tallies we've been getting from the ADP report we just talked about or the state unemployment claims we've been getting in the weeks leading up to this Friday jobs report, saying that as long as the government continues to spend, we should be able to brace such a high level of unemployment. Though it is high, a quick and swift recovery could ensue on the other side.

The big question, though, is exactly what Christian was highlighting there is whether Republicans and Democrats can come together to agree on not only if they continue to spend but how those dollars will be injected into the economy. And for more on that, we're joined now by The American College of Financial Services Professor and Frank M. Engle Chair of Economic Security. Michael Finke joins us now.

And, Professor, thank you so much for taking the time. When we look at this, it does seem like we are approaching the most controversial standpoint here between Republicans and Democrats in terms of this next wave of stimulus spending. So when you look at it, it seems like Republicans are finally starting to take issue with the deficit, largest we're expecting to see since World War II. So what do you make of what the spending should look like now to kind of support the surge in unemployment that we're seeing now?

MICHAEL FINKE: Well, it's a tough question because it's really all about whether you believe that unemployment is going to be sustained over a long period of time, and you have to create incentives to make sure that those who are unemployed are taken care of over the course of a few months until infection rates die down, or do you want to create a stimulus to try to get people to rejoin the workforce? For example, the payroll-tax incentive to get rid of the payroll tax, that is a way of directly providing more money into the pockets of workers, and it actually disproportionately benefits lower-income workers. It creates a strong incentive to rejoin the workforce. And then the question becomes is that something that you really want to do?

ZACK GUZMAN: I mean, yeah, seemingly at a time now when we had Democrats and Republicans kind of jockeying over that extra $600 in federal aid for unemployment benefits there at the state level, that was one thing that Republicans were trying to push back on to make sure that there wasn't too much incentives out there for people to stay unemployed since it could have provided more money than they were making while they were still working at their job before.

But when you do look at that, I mean, it is interesting to hear the president talking about payroll taxes again. That was one of the things he originally floated here as well as potential cuts to capital gains and permanently expanding the tax cuts that he, of course, had touted when he was still seeing the economy chug along at the clip that he enjoyed. But there is a large question there about what you do if the shutdown does last longer. We are seeing some states open, but, I mean, people-- if you look at the unemployment lines, the food-bank lines, clearly people are hurting right now in the short term. It took a long time to get some stimulus checks out there. So what's your take on that front?

MICHAEL FINKE: Yeah, I think that the question is how quickly can you get money in the hands of those who need the money the most? I mean, you have to restart the economy at some point. There's always a danger of inflation if you create too many incentives for those who have the greatest amount of wealth and spending power to spend more money when the pandemic ends. I think the primary focus in the short run really does need to be getting the money into the hands of those who simply need it to survive, and we know that there is a big percentage of the American population that is going to need some form of support. There's just no easy way to get it in their hands quickly such as a-- eliminating the payroll tax, that's something that you can implement almost instantaneously, but it only helps those who still have a job.

ZACK GUZMAN: Yeah.

KRISTIN MYERS: Professor, it's Kristin here. So I kind of want to continue on that thread. As you were mentioning, those payroll-tax cuts or that payroll-tax holiday only helping you if you actually have a job currently. [INAUDIBLE] previously we've seen in the past with the White House anytime we get [INAUDIBLE]-- tax cuts, I should say, they tend to skew towards the wealthy and businesses. Do you at all think that there's a fear here that perhaps if we start focusing more on tax cuts for future stimulus packages that the people that need it the most-- the most vulnerable, those low-wage workers or even now people that are completely out of jobs-- are really going to be, in a large part, left out of those stimulus measures?

MICHAEL FINKE: I think that's definitely a fear. I mean, those types of tax cuts are most effective if they provide incentives for those who control the businesses to actually help unemployed workers rejoin the workforce. So you've got to be very careful and targeted about those types of tax cuts.

Something like a capital-gains tax cut or elimination of the capital gains, that would be a pretty extreme measure. Of course, it would be very regressive. It would benefit those who have the most wealth, but it also might create an incentive for people to sell off a bunch of stocks that they've been holding onto, stocks that have appreciated and they have a lot of capital gains. That could actually have a negative impact on the stock market if it were implemented, especially if it was a short-term measure.

ZACK GUZMAN: And we also know that President Trump does actively look at the performance of the stock market as one of his report card-- his own grading mechanisms there.

But when we do look at it, you talk about the stock market, and it is interesting just because the CARES Act did introduce certain exceptions to the rules when we think about tapping retirement accounts for Americans across the country. Typically, you'd have to pay a penalty on that 10% penalty when you withdraw, but the CARES Act waived that penalty and allowed you more time to actually repay back into the 401(k) what you took out.

So when you look at that, obviously a lot of Americans are thinking about retirement right now. Perhaps some of them are preparing for it within the next few years. I know that you have done some research on that front to maybe look into maybe potentially why Americans might not need as much as they thought for retirement, and what's your take on how that plays out here?

MICHAEL FINKE: Yeah, one of the things we've done is we've looked at how people actually spend money in retirement. Do they really need to replace their income? And the reality is that for a lot of sort of upper-middle-class or higher-earning Americans, they may not need to replace as much of their preretirement income as they think. If they're making over $100,000 a year, then they probably only need to replace about 50% or 60% of their income to maintain the same lifestyle that they have. And what we see is that people actually end up spending less over time in retirement.

So that's good news, that you may not have as much of a need to spend money in retirement. And it's one of the reasons why, when we actually follow retirees, we see that they're not really spending down their money. In fact, a lot of them, especially those in the higher-income, higher-wealth categories, end up getting wealthier in retirement.

But I think for a lot of Americans, especially those who lost their job as a result of this pandemic and had expected to work maybe another three or four years, this is a critical time because they're going to have to make a decision about whether to dip into those defined-contribution savings.

ZACK GUZMAN: And perhaps, I mean, in that research, maybe a little bit less reason to be worried about retirement there if you're optimistic about, you know, maybe not spending as much as you might have otherwise thought you would have. But interesting findings there. Professor Michael Finke, I want to appreciate-- I want to thank you for taking the time to share that with us this morning. Appreciate you taking the time out of your day, sir.

MICHAEL FINKE: My pleasure. Thank you, Zack.