Paul L. Caron

Wednesday, July 31, 2019

Kleinbard: 'Indexing Capital Gains For Inflation By Administrative Fiat Is An Insult To The American Tax System'

Los Angeles Times, Incredibly, GOP Senators Are Demanding Billions More in Tax Cuts For the Rich:

The adage “Give ’em an inch and they’ll take a mile” doesn’t apply anymore in our modern age. Today, it’s better to say, “Give the rich trillions of dollars in tax cuts, and they’ll demand hundreds of billions more.”

That’s the message conveyed by a letter that went out Monday from 21 Republican senators, led by Ted Cruz of Texas, to Treasury Secretary Steven T. Mnuchin. They’re demanding that Mnuchin deliver a new tax cut via executive fiat.

The GOP complains that the capital gains tax isn’t indexed to inflation. As a result, the argument goes, taxpayers including “everyday Americans” are charged taxes on gains that are due purely to inflation, not to the real appreciation of their stocks or bonds. ...

[C]hanging the capital gains tax structure by fiat would circumvent the Democratic-controlled House Ways and Means Committee, where all fiscal legislation must originate. “Indexing capital gains for inflation by administrative fiat is plainly an unlawful overreach of regulatory authority and will be struck down” in court, says tax expert Edward Kleinbard of USC, a former chief of staff to the Congressional Joint Committee on Taxation. ...

“Today, we systematically undertax capital gains,” Kleinbard told me. The preferential rate on capital gains has been justified in part to compensate for the effect of inflation. Moreover, investors can eliminate the capital gains tax entirely simply by holding an asset to their death; the assets their heirs inherit are automatically revalued at the price at the original owner’s death, so the embedded capital gain is reset at zero. As Kleinbard observes, that makes the capital gains tax our only entirely voluntary tax. “To pile on top of that an inflation adjustment,” he says, “is an insult to the American tax system.”

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Would the same argument apply to Clinton's Treasury allowing closely held "limited liability _companies_" and such to "check the box" out of corporate tax, and often into a budding world of "hybrid entity" gimmicks? (Now finally the rates are much more even and the Code has anti hybrid rules.)

And is there an issue in the President and Senate's Federal Reserve appointees managing the rate of inflation - thus, the fake income?

Might an inflation-indexed capital gains tax - but at the usual income-tax rate, and with a conservative interest charge on deferral until realization - make the economy work better by no longer stressing buy-and-hold and concomitant stock-price inflation of businesses that should give way to others? It's hard enough for a clever, motivated investor to beat the market by a few percentage points, let alone beat that tax distortion.

Posted by: Anand Desai | Jul 31, 2019 10:32:06 PM