- President Donald Trump’s administration is considering adjusting Treasury Department regulations to index capital-gains taxes to inflation.
- Such a change would result in a roughly $US100 billion tax cut over the next 10 years, with 97% of the gain going to the top 10% of income earners.
- But there’s a problem with the idea: It’s probably illegal.
President Donald Trump is considering a massive new tax cut, but the administration’s plan to implement the tweak to the tax system is on shaky legal ground.
The New York Times reported Monday that the Trump administration was considering a change that would index capital-gains taxes to inflation.
The administration wants to fulfil this longtime Republican goal by adjusting Treasury Department rules, bypassing Congress.
What’s the plan?
Today, an investor who sells an asset is taxed on the difference between the amount paid for the asset and the amount earned in the sale.
- For instance, an investor who made a $US100,000 real-estate investment in 1990 and sold today for $US1 million must pay taxes on the $US900,000 difference.
- But Under Trump’s new plan, the $US100,000 investment would be adjusted for inflation.
- Based on the consumer price index inflation rate between 1990 and today, the value of the initial investment would be adjusted to about $US198,000.
- That means the investor would owe taxes on the $US802,000 difference, a significant savings compared with current law.
According to independent analyses, Trump’s plan would mainly benefit wealthy Americans, who make up a larger portion of asset sales. The Penn-Wharton Budget Model estimated that the change would cut taxes by $US102 billion over 10 years, with 97.5% of the benefit from capital-gains inflation indexing going to the top 10% of income earners. In fact, according to its estimate, 63% of the benefit would go to just the top 0.1% of income earners.
Why the plan is probably not feasible
This idea has come up before, but it was scrapped because it appeared to be on shaky legal grounds.
To implement the tweak, the Treasury Department would adjust the meaning of the word “cost” from the Revenue Act of 1918. Capital-gains indexing advocates say the original meaning of “cost” has not been clearly defined.
But in 1992, the administration of President George H.W. Bush considered making the same change Trump has now proposed and found that the Treasury Department had no legal grounds to make the switch.
In a report from the Justice Department, Assistant Attorney General Timothy Flanigan determined that the meaning of the word “cost” was not ambiguous, since the term had been defined over time by a series of legal rulings and additional legislation from Congress.
“The Department of the Treasury does not have legal authority to index capital gains for inflation by means of regulation,” the report concluded.
Brian Gardner, the director of Washington research at the investment bank Keefe, Bruyette & Woods, wrote in a note to clients that a lawsuit would be “almost certain” if the Trump administration went through with the plan.
“We think there is a good chance the administration would lose a lawsuit in court if it came to that,” Gardner said.
In addition, making the switch would create regulatory and logistical nightmares, says Len Burman, a fellow at the Tax Policy Center.
Indexing advocates say a series of legal rulings in the decades since the Bush administration study could open the door for the change. But the Trump administration would almost certainly be hit with a legal challenge if the Treasury Department made the switch.
“Indexing capital gains alone by executive fiat while leaving the rest of capital taxation unchanged would make no sense,” Burman wrote in a blog post. “It would cut capital gains taxes by up to $US20 billion a year for the richest Americans and open the door to a raft of new, inefficient tax shelters.”
Given the optics around the likely winners from the change and the thin Republican margin in the Senate, a legislative switch also doesn’t seem likely anytime soon.
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