Trump's Capital Wins Inflation Indexing: Is It Legal?

President Donald Trump is considering a massive new tax cut, but the plan of the administration to implement the tax system is on a fragile legal ground.

The New York Times reported Monday that the Trump administration is considering a change that would index capital gains taxes to inflation.

The administration wants to fulfill this long-standing Republican goal by adjusting the rules of the Treasury Department, bypassing Congress entirely.

What is the plan?

Currently, an investor who sells an asset is taxed on the difference between the initial amount paid for the asset and the amount of the sale value.

• For example, an investor who made a real estate investment of $ 100,000 in 1990 and sold today for $ 1 million must pay taxes on the difference of $ 900,000.
• But Under Trump's new plan provides that the investment of $ 100,000 will be adjusted according to inflation.
• According to the inflation rate of the consumer price index between 1990 and today, the value of the initial investment would be adjusted to about 198,000 $.
• This means that the investor will have taxes on the difference of $ 802,000, a significant saving compared to the current law.

According to independent analyzes, Trump's plan would primarily benefit wealthy Americans who make up a larger share of asset sales. Penn-Wharton's budget model estimated that the change would reduce taxes by $ 102 billion over 10 years, with 97.5% of inflation indexing capital gains benefiting the top 10%. paid. In fact, 63% of the benefit would only go to the top 0.1%.

Why This Plan Is Probably Not Achievable

This idea has already been raised but it was dropped because it seemed to have precarious legal basis .

To implement the tweak, the Treasury Department would adjust the meaning of the word "cost" of the 1918 Income Act. Advocates of capital gains indexing say that the original definition of "cost" has not been clearly defined.

But in 1992, the administration of President George HW Bush studied the legal status of doing exactly the same change and found that the Treasury Department had no reason to make the change.

In a report of the Department of Justice, Deputy Attorney General Timothy Flanigan determined that the meaning of the word "cost" was not ambiguous, since the term had been defined over time by a series of legal decisions.

"The Treasury Department does not have the legal authority to index capital gains on inflation through regulation," the report concludes .

Brian Gardner, Washington's director of research at Keefe Investment Bank, Bruyette & Woods, wrote in a note to clients that a trial would be "almost certain" if the administration Trump had adopted the plan.

"We think there is a good chance the administration will lose legal action if it should happen," Gardner said.

In addition, making the change would create regulatory and logistical nightmares, says Len Burman, a member of the Tax Policy Center.

Advocates of indexing say a series of legal rulings in the decades that have passed since the Bush administration study could open the door to change. But the Trump administration would certainly be affected by a court challenge if the Treasury Department made the change.

"The indexing of capital gains by independent executives while leaving the rest of the capital tax unchanged would make no sense," Burman wrote in a blog post. "This would reduce capital gains taxes by $ 20 billion a year for the wealthiest Americans and open the door to a host of new, inefficient tax shelters.

Given the focus around the probable winners of the change and the thin Republican margin in the Senate, a legislative change also does not seem likely anytime soon.