The White House isn’t actively considering the Treasury Department’s push to issue a rule that would slash tax bills for investors who have investment income, according to a person familiar with the discussions.
Treasury Secretary Steven Mnuchin told the New York Times earlier this month that his agency was looking at whether it could sidestep Congress to allow capital gains to be indexed to inflation. The change has appeal to some segments of President Donald Trump’s base, but White House officials are aware it would face an immediate legal challenge and has a narrow chance of being sustained, said the person who requested anonymity.
In another sign that the effort was largely confined to Treasury, White House Chief of Staff John Kelly wasn’t actively seeking the change as of Monday, a White House official said.
The idea of changing the tax treatment of capital gains started generating buzz in March, when Trump’s top economic adviser, Larry Kudlow, said he wanted a second round of tax cuts to include lowering the capital gains rate and indexing the original purchase price of an investment to inflation. The treatment of long-term capital gains was left untouched at 20 percent in the tax overhaul Trump signed in December.
“There has been a great deal of interest in the provision for a long time,” Lindsay Walters, a White House spokeswoman, said in an email. “Treasury is currently evaluating the economic impact and whether it can be achieved without legislation.”
Indexing capital gains to inflation means the original purchase price of an asset such as a stock would take inflation into account. That would effectively make that price higher, and the difference between it and the selling price smaller -- ultimately producing a lower tax bill for investors.
Ryan Ellis, a Republican lobbyist, said one of the issues with Treasury doing this unilaterally is that the administration can’t be that granular, whereas Congress can specify details in a bill.
Conservatives have long advocated for a change to the taxation of capital gains, arguing indexing it to inflation would help to spur the economy because investors would be more inclined to sell their investments and put the money to work elsewhere, rather than holding onto those assets until they die. Democrats argue the move would blow out the deficit and just benefit top earners who are most likely to earn investment income.
If Treasury decides to proceed and issue a rule indexing capital gains to inflation, it’s likely to lead to court challenges from critics who say it gives an unfair advantage to investment income and from those who say it needs Congressional sign off. At the root of the issue is whether Treasury can unilaterally change the definition of cost so taxpayers can use inflation in their calculations.
“There is an argument for indexing the entire tax system but when you index parts of it like this, and you don’t index interest deductions and depreciation allowances, you create large tax shelter opportunities,” said Jason Furman, a former top economic adviser to President Barack Obama and a professor of the practice of economic policy at Harvard University.