It's too late for Treasury Secretary Nicholas F. Brady to save his own job, but he could still save George Bush's--by using his regulatory authority to index capital gains for inflation. President Bush desperately needs to improve the economy and to identify himself with the job concerns of voters. His four years of inaction and failure to defend the accomplishments of Reaganomics have let his enemies paint a black economic outlook.
Now, it is very late in the game. It takes time for most economically stimulative measures to take effect. Plus, the Democratic Congress is not going to save Bush's bacon with legislation before the November election. A bad economy is the best thing Bill Clinton has going for him.
After waiting in vain for 24 successive cuts in interest rates to spur the economy, Bush has one shot left: He can index the cost basis of capital gains for inflation. This would provide the leadership necessary to unleash entrepreneurial spirit, and, if applied retroactively, it would unlock a vast amount of wealth in houses, farms, land, and other assets.
As it stands, the capital-gains tax is a wealth-confiscation device. Much--if not most--of the appreciation in value of any asset, especially one held for a long time, is inflation, and this tax on fictional gains devours the wealth of families. To avoid the unfair tax, people hold assets until their death in order to pass them through to heirs on a stepped-up basis that, in effect, indexes the assets for past inflation.
GREEN LIGHT. In a column last January, I argued that President Bush could unilaterally cut the capital-gains bite, because the cost basis of capital gains is defined by Treasury regulation, not by statute. The Treasury Secretary merely has to use his regulatory authority to include inflation in the cost basis, thereby taxing only real gains.
Secretary Brady thanked me for showing the beleaguered Administration the way out of the woods by telling The Wall Street Journal that my legal advice wasn't competent. "If we could do it," Brady said, "we would. We have had no competent legal advice that you could do it." During a television interview at the Republican convention, Brady repeated his earnest desire to index capital gains, if only a lawyer would give him permission.
Many doubt that Brady ever consulted lawyers or that the Administration would do anything to help entrepreneurs, whom they seem to prefer to put in jail. Brady now has the legal green light, however, and it comes from no less an authority than former Assistant Attorney General Charles J. Cooper--who, when he was the government's top lawyer, produced the brief saying the President lacked authority to exercise a line-item veto.
Now, in a 90-page brief, Cooper and his associates conclude that the legislative and regulatory history of the Internal Revenue Code's capital-gains provisions, the case law relating to the Treasury's interpretative discretion, and the irc itself all support the Treasury's discretion to interpret cost to account for inflation: "The legal basis for such a regulation is sound and would amply support its conscientious adoption by the Treasury. Indeed, we believe that a regulation indexing capital gains for inflation should and would be upheld judicially as a valid exercise of the Treasury's interpretative discretion under the irc."
NO GAIN. I have argued that no one would have the standing to challenge the new regulation in court, because no taxpayer could prove injury from the Treasury's recognition that a "gain" attributable solely to inflation adds nothing to a taxpayer's real income or wealth. Congress would have to overturn the regulation with a statute that explicitly required the taxation of inflation. Any member of Congress who supported such a law would be run out of his or her district. The timorous Bush Administration should also find comfort in Cooper's conclusion that "the legislative history of Congress' consideration of such proposals reveals, if anything, that Congress favors the concept of indexing capital gains." Indeed, Congress passed a law, effective in 1985, that indexed the personal income tax to prevent the taxation of cost-of-living adjustments.
Cooper's legal brief documents that Treasury is forever making regulatory changes that reinterpret the tax code, not least of which was the Bob Jones University case. Treasury wrote into the requirements for tax-exempt status a nondiscrimination requirement that is nowhere mentioned in the statute governing charitable tax exemptions. The challenge to this regulatory interpretation lost in the Supreme Court. Cooper makes it completely clear that the Treasury's ability to define cost by its regulations is routine and does not come close to stretching the elasticity of regulatory interpretation.
Invariably, the Republican Establishment promises to cut taxes in the future after the budget has been balanced. Reagan alone broke from this mold, and the economy boomed. Bush has used the deficit as an excuse for inaction, and the deficit has doubled on his watch. Unlike Reagan, he has nothing to show for it. Bush's policy of sacrificing the economy to the deficit, which has only grown larger, is a loser--which may make Bush one, too.