Five Reasons Trump’s Trial Balloon on Capital Gains Taxation Should Sink

Senior officials in the Trump administration are floating the idea that President Donald Trump could skirt Congress and cut taxes on his own. The goal is to adjust taxes on capital gains for inflation, which would reduce how much people have to pay the government. “Some believe Potus could do it as exec order,” National Economic Council Director Larry Kudlow wrote in an email to the Wall Street Journal in March. On July 30, the New York Times reported that Treasury Secretary Steven Mnuchin said in an interview earlier this month that “his department was studying whether it could use its regulatory powers to allow Americans to account for inflation in determining capital gains tax liabilities.”

There are legitimate reasons for concern that Trump and his people are overstepping. As long ago as 1992, the Treasury Dept. looked into the question for the administration of President George H.W. Bush and concluded that it lacked the authority to change the rules without Congress.

But even if Treasury’s lawyers conclude in coming weeks that the executive branch is entitled to index capital gains to inflation without Congress’s approval, that wouldn’t make it a good idea. It’s the substance of the proposal, not the means of promulgation, that’s the real problem. In May, Syracuse University economist Len Burman gave five reasons for disliking the indexation proposal in a blog post for the Tax Policy Center, the Urban Institute-Brookings Institution project he co-founded in 2002.

Capital gains are, of course, the profits earned on investments. The tax on them is paid when the investment is sold. Right now if you buy something for $60 and sell it for $100, you pay tax on $40 in profit. Under indexation, you’d pay tax only on the portion of gains that exceeded inflation. So if cumulative inflation over the period raised the cost basis of the investment to $80, you would pay tax only on the difference between $100 and $80, namely $20.