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Trump’s capital gains inflation index tax cut: is it legal?

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  • President Donald Trump’s administration is considering
    adjusting Treasury Department regulations to index
    capital-gains taxes to inflation.
  • Such a change would result in a $100 billion tax cut
    over the next 10 years, with 97% of the gain going to the top
    10% of income earners.
  • But one problem with the idea: it’s probably
    illegal.

President Donald Trump is considering a massive new tax cut, but
the administration’s plan to implement the tweak to the tax
system is on shaky legal ground.

The New York Times reported Monday that
the Trump administration is considering a change
 that
would index capital-gains taxes to inflation.

The administration wants to fulfill this long-time Republican
goal by adjusting Treasury Department rules, bypassing Congress
entirely.

What’s the plan?

Currently, an investor that sells an asset is taxed on the
difference between the initial amount paid for the asset and the
amount of the sale value.

  • For instance, an investor that made a $100,000 real estate
    investment in 1990 and sold today for $1 million must pay taxes
    on the $900,000 difference.
  • But Under Trump’s new plan, the $100,000 investment would be
    adjusted for inflation.
  • Based on the consumer price index inflation rate between 1990
    and today, the value of the initial investment would be adjusted
    to about $198,000.
  • That means the investor would owe
    taxes on the $802,000 difference, a significant savings
    compared to current law.

According to independent analyses, Trump’s plan would
mainly benefit wealthy Americans who make up a larger portion of
asset sales. The Penn-Wharton Budget Model estimated that the
change would cut taxes by $102 billion over 10 years, with 97.5%
of the benefit from capital-gains inflation indexing going to the
top 10% of income earners. In fact, 63% of the benefit would go
to just the top 0.1% of income earners.


capital gains tax inflation adjustment distributionAndy Kiersz/Business Insider

Why the plan is probably not feasible

This idea has come up before, but it was scrapped because it
appeared to be on shaky legal grounds.

To implement the tweak, the Treasury Department would adjust the
meaning of the word “cost” from the Revenue Act of
1918. Capital-gains indexing advocates
say the original definition of “cost”
has not been clearly
defined.

But in 1992, the administration of President George HW Bush
studied the legal standing of making the exact same change and
found that the Treasury Department had no grounds to make the
switch.

In a report
from the Justice Department
, Assistant Attorney General
Timothy Flanigan determined that the meaning of the word “cost”
was not ambiguous, since the term had been defined over time by a
series of legal rulings and additional legislation from Congress.

“The Department of the Treasury does not have legal authority to
index capital gains for inflation by means of regulation,” the
report concluded.

In addition, making the switch would create regulatory and
logistical nightmares, says Len Burman, a fellow at
the Tax Policy Center.

Indexing advocates
say a series of legal rulings
in the decades since the Bush
administration study could open the door for the change. But the
Trump administration would almost certainly be hit with a legal
challenge if the Treasury Department made the switch.

“Indexing capital gains alone by executive fiat while
leaving the rest of capital taxation unchanged would make no
sense,” Burman
wrote in a blog post
. “It would cut capital gains taxes by up
to $20 billion a year for the richest Americans and open the door
to a raft of new, inefficient tax shelters.”

Given the optics around the likely winners from the change
and the thin Republican margin in the Senate, a legislative
switch also doesn’t seem likely anytime soon.

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