How is that possible? Well, it has to do with how capital gains are defined. Up until now, that’s always just been the difference between the price you paid for an asset, and the price you sold it for. But the Trump administration, according to a report from Bloomberg News, thinks that it might be able to unilaterally change this to instead be the difference between the inflation-adjusted price you paid for an asset, and the price you sold it for (although this seems legally dubious). This would mean, for example, that if you bought $1 million worth of stock, and, after 10 years of 2 percent annual inflation, sold it for $2 million, then you wouldn’t have a $1 million taxable gain. You’d only have a $780,000 one. That’s because all of that inflation would have made the $1 million you spent a decade ago equivalent to about $1.22 million today. Which, in turn, means that the capital gains tax you owed would be reduced from $238,000 to $185,640.
This would be about as regressive as tax cuts get. That’s because it’s only a slight exaggeration to say that the super-rich are the only ones who are getting capital gains in the first place. Indeed, the nonpartisan Tax Policy Center estimates that households making $1 million or more get 76.6 percent of all the capital gains, while those making $100,000 or less only get 1.1 percent of them. Which is why it should be no surprise that, according to the nonpartisan Penn-Wharton Budget Model, indexing capital gains to inflation would only give 2.5 percent of its total tax cut to the bottom 90 percent, 11.4 percent to the 90 to 99 percent, 23 percent to the 99 to 99.9 percent, and a whopping 63.1 percent to the top 0.1 percent alone.
To put that in perspective, the top 0.1 percent of households would get a 25 times bigger tax cut than the bottom 90 percent combined.
It’s fair to say, then, that the Trump administration has an undiminished faith in the efficacy of tax cuts for wealthy investors even though empirical reality has given us plenty of reasons not to believe in it. Berkeley economist Danny Yagan, for one, has found that the Bush tax cuts on dividends didn’t seem to increase wages or corporate investment at all. And the early returns for the Trump tax cuts for corporations, for another, don’t seem much more promising. Not only has business investment barely gone up in response, but also, as Council on Foreign Relations economist Brad Setser points out, U.S. companies are actually holding more money overseas in tax havens rather than bringing it home like the administration said they would.
All of which might seem like successful policies compared to indexing capital gains to inflation. Why is that? Well, while those other tax cuts were supposed to work in theory, but didn’t really in practice, adjusting capital gains for inflation isn’t supposed to work at all. That’s not a joke. The Penn-Wharton Budget Model estimates that this would add nothing — as in, actually zero — to economic growth over the next 20 years. The reason for that is it would only modestly increase the incentive to save, but not to invest. That’s a very small plus, which would be entirely canceled out by the negative of bigger deficits — and maybe even more than that. In some scenarios, it could even hurt growth.
It’s a reminder that Trump might have campaigned as a different kind of Republican who would raise taxes on the rich and have “insurance everybody,” he’s governed, with the exception of his tariffs, as just about the most doctrinaire Republican you could find. He’s committed to cutting taxes for the rich, in fact, that he might try to do so by executive fiat.
What could be more Republican than that?