Andrew Harnik/AP Photo
White House chief economic adviser Larry Kudlow speaks to reporters the North Lawn of the White House.
On the heels of the revelation that the Trump administration is considering changing how the poverty line is adjusted for inflation, which would reduce public benefits for millions, the administration may further use the inflation measure as an excuse to cut taxes for the rich.
Last week, Bloomberg reported that Trump officials are once again considering indexing capital gains to inflation, which would in effect function as another tax cut for the wealthy—possibly to the tune of $100 billion to $200 billion over a decade. This, of course, is in addition to the $1.5 trillion in tax cuts from 2017’s Tax Cuts and Jobs Act.
When the administration has failed to pass its policy agenda, it has in the past unilaterally pushed its priorities through by either executive order or rulemaking. And just like the proposal to switch up how the poverty line is measured, the administration does not plan to go through Congress to index capital gains to inflation, but may instead use the regulatory process and issue a rule. There would likely be legal challenges to this strategy, as legal analysts have argued in the past that the president has no authority to change this part of the tax code.
In the case of public benefits, the poverty line is already indexed to inflation. But tying it to a different inflationary measure could mean fewer people counted as officially in poverty, meaning that they will either receive less help or be cut off from benefits entirely. Yet tying capital gains income to inflation would translate into more tax benefits for the richest among us.
Right now, when a wealthy person buys an asset and then later sells it, they pay capital gains tax on the difference. So let's say some billionaire buys an asset for $10 million, and then sells it after it's appreciated to $15 million. Under current policy, they would pay taxes on the difference: $5 million. But under the Republican plan, this billionaire would pay taxes on the difference between the inflation-adjusted price and the $15 million selling price. They would pay taxes on a much smaller amount.
“This is just another tax break for rich people,” says Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economy Policy, who authored a blog poston the policy implications of such a proposal. But even addressing whether the proposal makes economic sense raises serious red flags.
The move would join a number of tax breaks that already exist for capital gains, which are already taxed at a much lower rate than other types of income. For example, interest is deferred until the sale of the asset and ignored if it is passed down to an heir. Because of this, the tax code encourages wealthy folks to devise ways to treat their regular income as income from capital gains, and indexing capital gains to inflation would only encourage further gaming of the tax system.
When the administration was considering indexing capital gains to inflation in 2018, the Penn Wharton Budget Model, a research organization at the University of Pennsylvania, published findings that the majority—63.1 percent—of the benefits from this move would go not just to the top 1 percent, but the top 0.1 percent. Just 2.5 percent would be felt by those Americans in the bottom 90 percent of wealth.
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Before Larry Kudlow was named director of Trump's National Economic Council, he wrote in a 2017 CNBC op-ed that indexing capital gains to inflation would usher in “economic growth and prosperity.” He also described taxing inflationary gains as a “tax injustice.”
“If you believe that,” says Wamhoff, “you can make that argument about a lot of types of income.” But since the administration is considering its treatment of capital gains income, rather than income from, say, interest earned from savings, “it shows they're just fixated on helping wealthy investors.” For example, under current policy, interest from savings is actually taxed more than the income from capital gains. Interest from savings is taxed annually, but taxes on capital gains are deferred until the sale of the asset. “The erosion of value caused by inflation is therefore less of an issue for capital gains than other types of income,” Wamhoff writes in his analysis.
Owners of capital wealth capture roughly 30 percent of the income produced in America annually, through passive control of stocks, real estate, and other assets. Continued breaks and shelters for capital gains encourage more income derived in this fashion, reducing the tax base and worsening wealth inequality.
Republicans are open about how this helps rich people—doing so, they predictably argue, stimulates the economy. The plan “would help the stock market and it could unleash hundreds of billions of dollars of new capital for investment,” Stephen Moore, a former Trump campaign adviser who recently withdrew from consideration for a top post in the Federal Reserve Board, told Bloomberg.
Kudlow in his op-ed cites a former Treasury economist when claiming that “indexing capital gains for inflation this year would, by 2025, create an additional 400,000 jobs, grow the U.S. capital stock by $1.1 trillion and boost GDP by roughly $500 billion.” (This analysis is impossible to find—there are frequent mentions of it on conservative policy sites, but they all link back to Kudlow's citation-free op-ed.) The Penn Wharton Budget Model's analysis concluded that there would be no discernable economic impact from such a policy, just lost revenue. A 2018 Congressional Research Service report also found that the economic effects, if any, would be small.
There is also reason to believe that, like the proposal to adjust how inflation affects the poverty line, pushing this change through without legislative approval is illegal. In fact, the administration of George H.W. Bush considered indexing capital gains to inflation, but withdrew any attempt once various analyses concluded that the president didn’t have such authority.
The president hasn't given the law much weight when conducting his own business, so it makes sense he would ignore the law—and thus democratic norms—when governing as well. The rulemaking process, siloed in the executive branch, may be one of the best avenues he has to do this. In it, the administration seems to have found a way to force through an agenda which is almost a caricature of the Republican position, that is, slashing welfare while cutting taxes for the rich.
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