“It would truly be something if Trump cuts taxes for the rich by executive fiat right after cutting nutrition assistance for the poor by executive fiat.”
Ted Cruz led a group of 20 Senate Republicans in urging Treasury Secretary Steve Mnuchin to bypass Congress and deliver a tax cut to investors by indexing capital gains to inflation on Monday.
The senators wrote a letter to Mnuchin arguing that the policy change would encourage “savings, investment, and innovation so that everyday Americans can continue to enjoy better lives.”
The change would cut taxes for investors when they sell assets like real estate or stocks by “adjusting the original purchase price so no tax is paid on appreciation tied to inflation,” as per Bloomberg.
Critics, like the Los Angeles Times’ Michael Hiltzik, argue the change would be “hellishly complicated” and only benefit the super wealthy.
Capital Gains Tax Vs. Income Tax
The tax rate for capital gains is already lower than the rate for wage income: the top rate for investment income is 20%; the top tax rate for wage and salary income is 37%.
Many economists already blame the lower capital gains tax for contributing to extreme wealth inequality. According to the Center for American Progress, for middle class taxpayers earning between $75,000-to-$100,000, only 2% of their income comes from dividends or capital gains. Meanwhile, taxpayers who report income of $10 million or more have more than half their income come from capital gains or dividends, with only 17.5% of their salary coming from wages, as per the Center for American Progress.
Taxpayers who use traditional retirement vehicles like 401(k)s would also see no benefit from the change, because those savings are taxed at the normal income rate.
Studies show the index change would widen America’s wealth disparity. According to a 2018 report by the Wharton School, the top 1% of the population would gain more than 86% of the benefits of the change, while the bottom 90% would only get 2.5%.
“Today, we systematically undertax capital gains,” tax specialist Edward Kleinbard told the Los Angeles Times. “Indexing capital gains for inflation by administrative fiat is plainly an unlawful overreach of regulatory authority and will be struck down.”
Previous Attempts To Index Capital Gains To Inflation
The proposal to index capital gains to inflation has been floated for decades, but with a Democratic Congress, the tax cut would need to bypass congressional authorization. Earlier administrations have blocked attempts to pass the change through the executive branch.
“The question was: Can we, simply through administrative action, index capital gains,” wrote George HW Bush’s attorney general William Barr, who is again the attorney general today, in 1992. “And not only did I not think we could, I did not think that a reasonable argument could be made to support that decision.”
“Right now there’s no commitment to getting it done or not getting it done,” Mnuchin told Bloomberg earlier this month. “It’s a policy that has been under consideration and remains under consideration.”
But while Mnuchin is hesitant to make the unilateral move, National Economic Council chair Larry Kudlow has been pushing for it for years, and Trump is strongly backing Ted Cruz’s request, according to Bloomberg.
Opposition To The Proposal
A group of Democratic senators, led by Sen. Sherrod Brown, wrote a letter to Mnuchin urging him to drop Ted Cruz’s tax cut request.
“We remain concerned this administration’s relentless preoccupation with cutting taxes for our country’s wealthiest taxpayers while leaving behind middle class families and working people,” wrote Democratic senators in a letter to Mnuchin, “even to the extent that it would consider exceeding its legal authority to do so.”
Other critics pointed to the loss in treasury revenue the tax cut would cause, increasing the national debt which is now over $22 trillion dollars.
“This would add ~$100–200 billion to deficits. 86% would go to the top 1%, with new loopholes for the wealthy. And the Administration lacks legal authority to do it,” tweeted Chye-Ching Huang, director of federal fiscal policy at the Center on Budget and Policy Priorities.
Critics also point to the Trump administration’s recent efforts to cut 3 million people off food stamps as an indicator of his loyalty to the super-rich rather than the American people.
“It would truly be something if Trump cuts taxes for the rich by executive fiat right after cutting nutrition assistance for the poor by executive fiat,” wrote Seth Hanlon, senior fellow at the Center for American Progress.
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