The Trump administration’s new National Economic Council director, Lawrence Kudlow, has a lifelong monomaniacal obsession with reducing taxes for the rich. Unfortunately for Kudlow and his boss, Republicans have already used up their one-per-session budget reconciliation bill, which would allow them to pass a tax cut bill with a majority vote in the Senate, unlike the normal 60-vote requirement. And since Democrats aren’t about to support another tax cut for the rich — zero supported the last one — they’re stuck for this term.
Or are they? The Wall Street Journal’s Richard Rubin reports that Kudlow is interested in applying an inflation index to the capital gains tax. “Some believe Potus could do it as exec order,” he told Rubin via email.
The policy Kudlow is describing would reduce the amount of taxable income paid by people who receive income from capital gains (mostly, by selling stock). As it stands, right now, if you bought $1,000 worth of stock, and sold it ten years later for $1,500, you would pay tax on the $500 you gained.
The tax code already confers a lot of benefits upon capital gains income. First of all, people who earn money from capital gains don’t pay ordinary income tax rates, as they did in the aftermath of the 1986 Tax Reform Act. They pay a tax rate that’s about half the level of taxes on ordinary income. Second, they get the additional benefit of deferring all taxes until the sale goes through. Their stock portfolio can appreciate for years or decades without any tax, unlike wage income, on which taxes are paid annually. And third, gains in stock that is passed on to heirs go completely untaxed, a massive break.
Conservatives have long wanted to give capital gains an additional break, by subtracting inflation from the taxable gain. So, to go back to that $500 stock gain, if inflation ran a total of 10 percent over that decade, then the IRS would knock $100 off the value of the sale, and you’d only be taxed for a $400 capital gain.
Republicans have been proposing this change for a long time but have never enacted it, in part because Democrats have opposed it as a complicated change that would give rich people a windfall for no serious economic benefit. The Congressional Budget Office published a paper analyzing it back in 1990. Kudlow is proposing that Trump would just go ahead and order the IRS to implement this change on its own, via executive order.
If Trump does this, would it stand up in court to a legal challenge? Probably not, since Congress obviously did not intend to make this change when it wrote capital gains tax laws —but you never know what judge you might get.
Of course, Republicans might oppose such a move because of their long-standing principled belief, expressed repeatedly during the Obama administration, that the president should not bypass Congress to enact unilateral— ha ha ha, obviously they don’t actually care about that stuff anymore.