TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, July 14, 2018

Can Trump Enact A Second Tax Cut On His Own By Indexing Capital Gains?

Wall Street Journal op-ed:  Trump Alone Can Cut Taxes, by Kimberley A. Strassel:

What if President Trump had the authority—on his own—to enact a second powerful tax reform? He does. The momentum is building for him to use it.

In the halls of Congress, the corridors of the administration, and the nerve centers of activist groups, forces are aligning behind a plan: a White House order to index capital gains for inflation. It’s a long-overdue move—one that would further unleash the economy and boost GOP election prospects. And Mr. Trump could be the president bold enough to make it finally happen.

At President Reagan’s behest, Congress in the 1980s indexed much of the federal tax code for inflation. Oddly, capital gains weren’t similarly treated. The result is that businesses and individuals pay taxes on the full nominal amount they earn on investments, even though inflation eats up a good chunk of any gain. It’s not unheard of for taxes to exceed real gains after inflation. The result is significant capital distortion, as companies sit on buildings and property or investors sit on stock—rather than selling and thereby putting both assets and gains to more productive use.

Conservatives have understood this problem for decades, yet for decades they have been held hostage to a 1992 government brief. The paper by the Justice Department’s Office of Legal Counsel offered a few faulty arguments as to why the Treasury lacked the authority to make this regulatory change. Neither President Bush questioned it, but others have.

Americans for Tax Reform President Grover Norquist —chief troop-rallier in this effort—has been circulating a 2012 paper by lawyers Chuck Cooper and Vincent Colatriano that details that 1992 opinion’s flaws. It points out that the Internal Revenue Code does not require that the “cost” of an asset be measured only as its original price—meaning there is no reason Treasury could not construe it in today’s dollars. More important, it noted that since the Supreme Court decision in Verizon Communications v. Federal Communications Commission (2002), regulators have leeway in how they define “cost.” ...

What’s new of late is the growing, and powerful, backing. Senate heavyweights Ted Cruz and Pat Toomey had already this year introduced a capital-gains indexing bill, and House Republican Devin Nunes tells me that he is next week introducing his own, though he believes “the administration could implement [the change] under its own authority.” House Freedom Caucus Chairman Mark Meadows on Thursday sent a letter to President Trump encouraging Treasury to put the change in place by Oct. 1. Mr. Trump’s top economic adviser, Larry Kudlow, wrote a column last year calling on the president to “spark a wave of prosperity” with an indexing order. Vice President Mike Pence pushed this issue in 2006 when he was still in Congress. And dozens of outside groups, from ATR to Club for Growth to the National Federation of Independent Business, are pushing to end the “inflation tax.”

Daniel Hemel (Chicago) & David Kamin (NYU), The False Promise of Presidential Indexation:

The Trump administration faces mounting pressure from conservative thinkers and activists—including calls from its own National Economic Council director—to promulgate a Treasury regulation that indexes capital gains for inflation. Proponents of such a move—which is sometimes called “presidential indexation”—make three principal arguments in favor of the proposal: (1) that inflation indexing would be an economic boon; (2) that the President and his Treasury Department have legal authority to implement inflation indexing without further congressional authorization; and (3) that in any event, it is unlikely that anyone would have standing to challenge such an action in court. This article evaluates the proponents’ three arguments and concludes that all are faulty.

First, whatever the merits of comprehensive legislation that adjusts the taxation of capital gains and various other elements of the Internal Revenue Code for inflation, rifle-shot regulatory action that targets only the capital gains tax would be costly and regressive, and would open a number of large loopholes that allow for rampant tax arbitrage. Second, the legal authority for presidential indexation simply does not exist. The Justice Department under the first President Bush reached the conclusion in 1992 that the Executive Branch cannot implement inflation indexing unilaterally, and doctrinal developments in the last quarter century have—if anything—strengthened that conclusion. Third, a number of potential plaintiffs—including states, charitable organizations, and brokers subject to statutory basis reporting requirements—would likely have standing to challenge presidential indexation in federal court. In sum, the promise of presidential indexation turns out to be hollow, and calls for unilateral action should be spurned.

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This issue is not nearly as simple as the editorial implies. It will be fascinating to watch.

For decades Congress has dodged accountability by ceding power to the Executive. If Trump decrees indexation we may finally see Congress resist Executive arrogation of power rather than abet it.

Posted by: AMTbuff | Jul 14, 2018 8:44:24 AM

If Trump wants an easy PR win on indexation, he could order the IRS to allow indexation of basis only on primary residences. Such an order would have no legal basis I'm aware of, but the courts might let it slide by as they did the individual mandate in Obamacare.

Posted by: AMTbuff | Jul 14, 2018 8:49:45 AM

I would bet there’s a story behind that “Oddly.” Perhaps in the 1980s it was thought desirable to maintain an influential constituency with an. Interest in low inflation?

Posted by: PJ | Jul 15, 2018 4:54:19 AM

This sounds like something that will easily attract criticism as "tax cuts for the rich" since it is assets-based. Certainly moreso than the previous tax cut bill.

Posted by: Israel P. | Jul 15, 2018 5:08:39 AM

The fact that the swamp wants this so badly is one reason for the President to avoid it.

Posted by: D Bosch | Jul 15, 2018 5:33:36 AM

What is the rationale for taxing capital gains at a lower rate than ordinary income? I've justified it to myself as compensating for inflation. If we take that away, is there any other rationale? Other than to reward saving, which should only apply to individuals, I would think.

Posted by: brad | Jul 15, 2018 7:38:38 AM

Re the comments from Hemel and Kamin, I am astounded by their arrogance. The first reason for indexing capital gains is the same reason that indexing has happened throughout the economy, namely, fairness, that the government should not be the beneficiary on inflation. The precedents for that are universally available for Hemel/Kamin to understand and note.
Separately, I am not a tax lawyer, or a constitutional lawyer, but I am not asleep at the wheel either. The President as head of the executive branch should be able to direct the IRS (certainly Obama did.....) because the IRS is in the executive branch. If Congress has not defined “cost basis” or if there is vagueness about that, or even the lack of great specificity about that, since legislators are not accountants, the executive branch should be able to define the cost basis as it sees fit. Certainly, the IRS defines many things as it sees fit, without regard to rationality, and other agencies have gone much, much, much further afield in filling in the details of legislation. Why can’t the IRS, which is already an outlier in agency comparability, do the same?
The question about standing is moot, because lawsuits would fly from the resistance regardless, and possibly, there are other issues re arbitrages and practicality that could be material (though Hemel/Kamin have not cited any). I would appreciate any thoughtful response. Thank you!

Posted by: David g | Jul 15, 2018 8:04:39 AM

"Third, a number of potential plaintiffs—including states, charitable organizations, and brokers subject to statutory basis reporting requirements—would likely have standing to challenge presidential indexation in federal court." But brokerages benefit when investing becomes more attractive. It seems unlikely that back-office concerns would drive them to seriously oppose such a move.

Posted by: David Foster | Jul 15, 2018 8:26:17 AM

Would not "Chevron deference" apply? There is a good case based on economic fairness to index capital gains, so it should be an easy sell. "Chevron deference" is a dangerous breach od separation of powers, but as long as it is there, …

Posted by: SgtDad | Jul 15, 2018 11:14:33 AM

Crazy idea. The current capital gains rates were set against the backdrop of unindexed basis: the intention of Congress is pretty clear, and shouldn't be changed by executive order. Allow this and a future administration could raise taxes uniletrally by changing definitions of income (and, of course, not changing the rates to compensate, as is being suggested here).

Posted by: Not this again | Jul 15, 2018 12:41:27 PM