JUST WHEN it seemed there was no possible way to reduce taxes on wealthy Americans any further, President Trump’s economic team has reminded us that nothing is impossible as long as you really, really want to achieve it. The Trump team is considering a proposal, long advocated by Larry Kudlow, director of the National Economic Council, to impose the capital-gains tax only on the inflation-adjusted profit from a sale of assets, rather than the full amount as at present. And they might decree this large tax cut for investors by regulation, without an act of Congress. “If it can’t get done through a legislation process, we will look at what tools at Treasury we have to do it on our own and we’ll consider that,” Steven Mnuchin, the treasury secretary, told the New York Times.
There are two questions here: substantive and procedural. On the latter, it’s doubtful the president really does have the power to change the base upon which taxes are levied simply by reinterpreting the internal revenue laws. Or so the Justice Department officially opined during the George H.W. Bush administration. Because this administration cannot be counted on to respect such niceties, it’s best also to consider the substantive merits of the idea — which are dubious, too.
We don’t necessarily object, in principle, to indexing capital gains to inflation. During a period of high and persistent inflation, it might be both unfair to investors and bad for the economy to tax, say, stock profits, as if the dollars you sold the stock for were worth the same as the dollars you bought it with. (Ordinary income-tax brackets, after all, are indexed to inflation so as to protect wage earners.) This was a problem in the 1970s when inflation was in the double digits and the maximum rate on long-term capital gains was nearly 40 percent.
Today, though, inflation has been running at 2 percent or below for about a decade, and the maximum capital-gains rate is 23.8 percent. The unfairness to investors, and the distortion to the economy, from failing to levy the tax on only the inflation-adjusted value of the gain are relatively small. Compared with the government’s need for revenue, they are truly trivial. In other words, it may be that current law permits the government to collect a bit more from the wealthy than it could under ideal inflation-proofed conditions — and that’s just fine.
The United States has higher priorities at the moment, or ought to, than inflation-proofing the capital gains that a tiny, privileged percentage of its population must report to the Internal Revenue Service. Those priorities include not further exacerbating already high levels of economic inequality. And they include fiscal responsibility: Researchers at the president’s alma mater, the University of Pennsylvania’s Wharton School of Business, suggest that the proposed change would cost $102 billion over 10 years. A little more than two weeks ago, on July 13, the White House updated its budget projections to show an increase in the 10-year deficit, already swollen by tax cuts, of $926 billion. As part of their “consideration,” Mr. Trump’s advisers should reread that budget report.