White House Distances Itself from Big Tax Cut for the Wealthy

White House Distances Itself from Big Tax Cut for the Wealthy


The New York Times reported Monday that the Trump administration was considering bypassing Congress to enact another big tax cut that would mainly benefit the wealthy. The White House pushed back on the report Tuesday, saying that it wasn’t actively reviewing any such plan at this time.

Nevertheless, the idea that Treasury Secretary Steven Mnuchin said his department was studying — indexing capital gains taxes to inflation — has long been popular with conservatives, including Larry Kudlow, the president’s top economic adviser. There’s a good chance we’ll hear about it again, perhaps after the fall elections.

Mnuchin told the Times’ Alan Rappeport and Jim Tankersley earlier this month that his department was trying to determine if it has the legal authority to make such a change in the absence of legislation from Congress, and the White House confirmed Tuesday that the analysis continues.

“Treasury is currently evaluating the economic impact and whether it can be achieved without legislation,” said Lindsay Walters, a White House spokeswoman.

Here are some basics on inflation indexing, should the Treasury Department decide to pursue it further:

How it would work. Currently, investors use the nominal price they paid for an asset when reporting capital gains or losses to the IRS after a sale. Indexing would mean that the price paid could be adjusted for inflation, reducing the profit involved when the asset is sold, thereby reducing the taxes owed. For example, if you bought a share of stock for $100 in 1980 and sold it for $400 this year, you’d owe taxes on the $300 gain. Using indexing, the purchase price would be about $320, meaning you’d only owe taxes on some $80 in gains.

How much money is involved? Allowing indexing for capital gains would cost the U.S. about $100 billion over 10 years, according to an analysis done earlier this year by John Ricco of the Penn Wharton Budget Model.

Who would benefit? The great majority of capital gains are reported by upper-income households, so the benefits would accrue largely to the wealthy. The chart below from The Washington Post illustrates Ricco’s data, which shows that the top 1 percent of households would claim more than 86 percent of the reduced taxes. As with virtually all tax cuts, conservatives argue that indexing capital gains would encourage more asset sales and boost economic growth.

What’s the holdup? The Trump administration may not want to associate itself with what many are calling more tax cuts for the rich ahead of the midterm elections. And there are fundamental constitutional issues, since it’s not clear that the Treasury has the legal authority to make such a change. President George H. W. Bush’s administration considered the issue in 1992 and concluded that the Treasury could not unilaterally impose indexing, but such a move has never been tested in court.