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Trump Administration Eyes Capital Gains Tax Cut

Jul 31, 2018
Originally published on August 1, 2018 7:33 am

The Trump administration is considering another big tax cut.

The administration is studying a proposal to cut capital gains taxes, a move that would primarily benefit the wealthiest Americans.

"There's been a great deal of interest in this provision for a long time," White House spokesman Hogan Gidley told reporters traveling aboard Air Force One Tuesday.

Treasury Secretary Steven Mnuchin told the New York Times that if Congress won't cut taxes on capital gains, the administration might try to do so on its own. Critics warn that would only add to a federal deficit that's already approaching $1 trillion a year.

Capital gains taxes are what you pay when an investment makes money. Say you buy some stock for $100, hold it for a decade, and then sell it for $500. Your profit, or "capital gain," is $400, and that's the amount you pay taxes on.

Of course, during that decade, inflation would have nibbled away at that profit, so the $400 is worth less than it was ten years earlier. The administration is considering a plan that takes that inflation into account, so investors would report a smaller capital gain — on average about a third less — and they'd be saddled with a smaller tax bill.

"It's not fair for the government to tax someone on a gain that really is just due to inflation," said Stephen Moore, an economist at the Heritage Foundation and a former adviser to the Trump campaign.

Moore said many investors now feel locked into to holding assets they might otherwise sell, just to avoid paying an inflated tax bill. He likes the idea of taxing only capital gains that are over and above the rate of inflation.

"You would see a lot of people selling their assets and then moving into more productive assets," Moore said. "And we believe this would lead to unlocking potentially trillions of dollars that could be redeployed in higher and more productive assets."

The change would carry a big price tag, however, for the federal government. Leonard Burman, co-founder of the nonpartisan Tax Policy Center, estimates the change would reduce federal tax revenues by as much as $20 billion a year. And the tax savings would overwhelmingly go to people at the very top of the income ladder.

"More than three-quarters of capital gains tax were paid by people with incomes over a million dollars," Burman said. "And virtually all of it is paid by people with incomes of over $100,000."

The wealthy were also the biggest beneficiaries of last year's GOP tax cut. And people who make their money off investments already get favorable treatment under the tax code, compared to those who rely on wages and salaries.

"Capital gains are already taxed at a lower rate than other income," Burman said. "So you'd be adding a tax break on top of another, very, very big tax break, one of the biggest in the code."

Fiscal watchdogs are also concerned about any reduction in tax revenue at a time when the government is awash in red ink. The federal deficit is expected to top $1 trillion next year, thanks to the big tax cut passed last year and a surge in new government spending.

"Right now it's a period of fiscal free-lunchism where nobody is talking about paying for anything," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. "And people keep dangling new goodies and trying to ignore this huge mountain of debt."

The Treasury Department is studying whether it could reduce capital gains taxes on its own, simply by changing some definitions in the tax code, rather than looking to Congress. Previous administrations have shied away from that step, which would be sure to invite a legal challenge.

"Congress has had 100 years to define capital gains as adjusted for inflation and they've never chosen to do it," Burman said. "The reason is that it costs a lot of money. And probably because it's regressive. It doesn't look good to give such big tax cuts to super wealthy people."

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