Conservatives eye new tax cut for capital gains

Conservatives are making a push to cut taxes on capital gains as a follow-up to the tax-cut measure President Trump signed into law last year.

Republican lawmakers and prominent conservative leaders such as Grover Norquist say they want capital gains to be indexed to inflation, saying it would give the economy a boost. They are pursuing both legislation and regulatory action in an effort to achieve that goal.

It’s unclear when or if it will happen, but conservatives are bullish about the possibility of a unilateral move by the Trump administration. They feel the odds have been bolstered by Larry Kudlow’s entry into the administration as National Economic Council director.

{mosads}“It would be phenomenal for the economy,” Norquist said. 

People pay capital gains taxes when they sell investments, such as stocks or, in some cases, real estate.

Currently, people pay capital gains taxes on the difference between the cost of purchasing an asset and the amount for which it was sold. But conservatives want to change that, so that people only pay taxes on the difference between what they paid for the investment plus inflation and the amount for which the investment sold.

Here’s an example given by Norquist in a letter he sent to Treasury Secretary Steven Mnuchin earlier this month: Under current policy, someone who made an investment of $1,000 in 2000 and sold it for $2,000 in 2017 would pay capital gains taxes on the $1,000 difference. But if capital gains were indexed, the investor would only pay taxes on $579, since $1,000 in 2000 would be equivalent to $1,421 in 2017 after adjusting for inflation.

“It’s an issue of fairness,” said Andy Roth, vice president of government affairs at the Club for Growth. “There’s currently an injustice in the tax code that forces people to pay taxes on income that did not occur.”

Conservatives say that indexing capital gains to inflation would unleash more capital investment and increase wages, household net worth and returns to shareholders.

“It benefits rich, poor, middle class, everybody,” said Ryan Ellis, a senior tax adviser for the Family Business Coalition.

Indexing would also allow conservatives to achieve a long-sought goal of lowering taxes on capital gains.

The top tax rate for long-term capital gains is nearly 24 percent, including a 3.8 percent surtax on high earners’ net investment income. That surtax was created under ObamaCare.  

The capital gains rate remains significantly lower than the top individual income tax rate of 37 percent set under the new tax law.

But while right-leaning groups pushed for the 3.8 percent tax to be repealed as part of ObamaCare repeal, the GOP ultimately failed last year in undoing most of the 2010 health-care law. As a result, capital gains taxes were largely left unchanged.

“There is a sore spot” on capital gains, Ellis said.

Republicans on Capitol Hill also have an interest in indexing capital gains. Sens. Ted Cruz (R-Texas) and James Inhofe (R-Okla.) introduced legislation on the topic last week.

“It is a pro-growth, pro-investment policy decision, because what it would do is encourage people … to invest more capital in businesses,” Cruz said at an event earlier this month hosted by Norquist’s group, Americans for Tax Reform.

Similar legislation has been introduced in the House in prior years and may be offered again in the chamber in the coming weeks. In 2007, Vice President Pence as a member of the House introduced a bill on indexing whose co-sponsors included Rep. Kevin Brady (R-Texas), the current Ways and Means Committee chairman, and Rep. Paul Ryan (R-Wis.), now the Speaker.

“A few years ago, Chairman Brady co-sponsored then-Rep. Mike Pence’s legislation to index capital gains to inflation. He continues to be interested in these ideas as good, commonsense policy that would help spur economic growth,” said Julia Slingsby, a spokeswoman for Brady.

But legislation appears to have little chance of success, especially in a midterm election year. Democrats aren’t likely to support Cruz and Inhofe’s bill since it would likely be scored as largely benefiting the wealthy.

“It would be another costly regressive tax cut on top of the package passed last year,” said Chye-Ching Huang, deputy director of federal tax policy at the left-leaning Center on Budget and Policy Priorities. She noted that the Penn Wharton Budget Model estimates that indexing capital gains to inflation would lower the government’s individual tax revenues by about $100 billion over 10 years.

With little hope of success in Congress, conservatives are pushing the Treasury Department to enact the policy change through regulatory action. A coalition of conservative groups pressed Trump and Mnuchin on this in January, and Norquist sent another letter to Mnuchin earlier this month.

Conservatives think their chances are good because Kudlow, who was chosen to be National Economic Council director in March, has been a top supporter of using regulatory authority to end capital gains taxes on inflation.

“The president should use his executive authority — as he so often has to drain the swamp — to remove this prosperity-killing practice,” he wrote in a column for CNBC in August.

The White House signaled that any action on the topic may be a ways off.

“This is still just an idea. No official policy is being pursued at this time,” a White House official said.

Conservatives argue that the Treasury Department has the authority to index capital gains through regulation in light of a 2002 Supreme Court decision finding that said the term “cost” was ambiguous in a telecommunications law.

But some on the left think that the argument that indexing can be done through executive branch action is weak. They cited a 1992 memo from the Justice Department’s Office of Legal Counsel ruling that the Treasury Department doesn’t have the authority to index capital gains and said the 2002 Supreme Court ruling is unrelated to the tax code.

“I think they do not have the authority to change this by regulation,” said David Kamin, a New York University law professor and economic adviser to former President Obama.

Those with concerns about indexing capital gains also note that doing so would be complicated.

Supporters of indexing capital gains have pointed out that other elements of the tax code are indexed, such as individual tax brackets. 

But other experts, such as Tax Policy Center co-founder Len Burman, noted that other aspects of taxation on capital income and expense aren’t indexed, such as debt.

While indexing capital gains “seems appealing on its face,” Burman said, it doesn’t make sense to only tie one form of capital income to inflation.