Twenty-one Senate Republicans led by Ted Cruz (R-TX) this week urged Treasury Secretary Steven Mnuchin to use his regulatory authority to eliminate inflationary gains from the calculation of capital gains tax liability. (Letter to Secretary Mnuchin , July 29)
The Treasury Department may have the legal authority to adopt inflation indexing through regulatory guidance. The term "cost" in the tax code's capital gains provisions arguably is ambiguous and not plainly limited to historical cost, i.e ., the price originally paid for a capital asset.
- Capital gains tax is generally based on the difference between the sale price of a capital asset and its original cost, adjusted for certain factors such as depreciation. Capital gain liability includes an amount that reflects general price inflation, in addition to the true economic gain. Especially for long-held assets such as real estate, capital gain thus overstates a taxpayer's economic income.
- The Republican Senators' letter suggests that indexing capital gains for inflation "would unlock capital for investment, increase wages, create new jobs, and grow the economy."
- The Treasury Department may have the legal authority to adopt inflation indexing through regulatory guidance. The term "cost" in the tax code's capital gains provisions arguably is ambiguous and not plainly limited to historical cost, i.e., the price originally paid for a capital asset.
- Supporters of the proposed plan include President Trump's National Economic Council Director Larry Kudlow, who is leading a White House task force examining the proposal. (Wall Street Journal, March 20, 2018)
- Stephen Moore, former advisor to President Trump's 2016 campaign, also recently wrote that President Trump wants to move forward with capital gains indexing. (Washington Times, July 14, 2019)
- However, a 1992 memorandum written by President George H.W. Bush's administration determined that Treasury did not have the power to index capital gains by regulation. (Justice Dept. Opinion - Sept. 1, 1992). In contrast, more recent legal analysis has found support in subsequent case law. (Harv. J. Law & Pub. Policy, 2012).
- Conservatives such as Americans for Tax Reform President Grover Norquist cite a 2002 Supreme Court decision in a case between Verizon Communications and the Federal Communications Commission to show Treasury can act unilaterally on the issue. (Americans for Tax Reform - June 26, 2019)
- Congressional Democrats have come out strongly against the proposal. A recent letter to Secretary Mnuchin from 15 Democratic Senators stated, "We urge you to reject reported plans to use questionable authority to - yet again - lavish tax cuts upon our country's wealthiest, while middle class families and working people continue to see costs rise and wages stagnate." (Senate Democratic letter, July 12). House Ways and Means Committee Chairman Richard Neal (D-MA) on Wednesday stated, "If the Trump Administration unilaterally changes the capital gains tax structure, it wouldn't just be bad policy, it would be executive overreach." (Ways and Means news release, July 31)
Senate Finance Committee Ranking Member Ron Wyden (D-OR) this week also responded to the proposal, stating, "The Office of Legal Counsel has plainly stated that the Treasury secretary does not have the authority to index capital gains tax rates." (Senate Finance news release, July 30). Wyden added such an action would "absolutely" end up in court. "We will oppose this strongly, because this is another backdoor effort to flout responsible tax policy," he told reporters. (TaxNotes, July 31 and New York Times, July 30)