Trump administration considers tax cut for the country's super-rich

'American families are drowning under the weight of stagnant wages and higher health costs but the GOP continues to pick their pockets to give more handouts to the wealthiest 1 per cent'

Damian Paletta
Tuesday 31 July 2018 16:18 BST
Trump promises 'giant, beautiful, massive' tax cut to US firms

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The Treasury Department is considering a tax cut for the wealthiest Americans through a change that would not need approval from congress, officials said, in a move that would follow a package of tax cuts last year that also benefited the super-rich.

The agency is studying whether to allow investment income, known as capital gains, to be adjusted for inflation in a way that shields more of it from taxation. Most capital gains are paid by wealthier Americans, who disproportionately hold large portfolios of investments.

But the use of executive power on such a significant change to the tax law would be highly unusual and could be vulnerable to a legal challenge. Senior administration officials have discussed whether to proceed but have not concluded they have legal authority to do so. The move was rejected during the George W Bush administration because it was seen as outside the scope of treasury’s authority and only attainable via an act of congress.

The idea has long been advocated by White House National Economic Council director Larry Kudlow, but tax changes this drastic are typically made by congress, not the treasury and Internal Revenue Service. Still, treasury secretary Steven Mnuchin told the New York Times in an interview that he was reviewing whether to move ahead if congress doesn’t act on its own.

“If it can’t get done through a legislation process, we will look at what tools at treasury we have to do it on our own and we’ll consider that,” Mr Mnuchin told the New York Times. “We are studying that internally, and we are also studying the economic costs and the impact on growth.”

Mr Mnuchin made clear that he had not decided whether he would approve such a change. And he has not determined whether he believes the change would be legal, two senior administration officials said, speaking on the condition of anonymity to discuss the internal deliberations.

Republicans passed a massive package of tax cuts last year that lowered the tax rate for all income groups, with big benefits going to wealthy Americans and businesses. Despite mounting worries from lawmakers about the growing federal deficit, Trump said earlier this year that congress was going to try to pass another package of tax cuts this year that would be largely targeted at helping the middle class. Senate republicans have not signalled how they plan to proceed.

“Once again, republicans have exposed the true priorities of their tax scam: billions in tax breaks for the wealthiest at the expense of everyone else,” House Minority leader Nancy Pelosi, said in a statement. “American families are drowning under the weight of stagnant wages, higher health costs and soaring prescription drug costs, but the GOP continues to pick their pockets to give more handouts to the wealthiest 1 per cent.”

Capital gains represents the income someone receives from an investment over time. If an investor buys a stock for $100,000 (£76,100) and sells it later for $110,000 (£83,700), they have a capital gain of $10,000 (£7,600) and typically must pay a tax on that difference. The $100,000 initial purchase price is considered the “cost” of the investment, and the capital gain is determined based on the cost.

Mr Kudlow and others have said the cost should be indexed to inflation. So once an investor sells an investment, if that “cost basis” is considered higher because of inflation, the capital gain would be less, requiring an investor to pay less in taxes.

But any unilateral change could be subject to a court challenge from other groups that want their own tax-related concerns indexed to inflation. And other groups could sue and say it is outside the scope of Treasury’s authority to make a legal ruling that needs congressional authorisation.

In September 1992, the Justice Department during the end of the Bush administration found that Treasury did not have the legal authority to make the change unilaterally. It predicted that adopting the inflation change without input from congress would be challenged in court, and that the government would lose the case.

Conservatives have long sought to cut capitals gains taxes, arguing that it would encourage investors to sell stock and move their money towards new investments, helping more companies grow. But these proposals have often faltered in congress because of how the changes would disproportionately aid the wealthiest households.

Researchers have estimated that the top 5 per cent of households in terms of income hold about two thirds of all stock and mutual fund investments, putting wealthier Americans in the position of benefiting much more than others from any changes to capital gains rules.

Several congressional republicans have introduced plans that would legislatively index capital gains to inflation, including senator Ted Cruz of Texas and representative Devin Nunes of California. The idea has also been promoted widely by Grover Norquist, founder of Americans for Tax Reform and a leading conservative voice on tax cuts.

Steve Moore, a close friend of Mr Kudlow’s, said there is an active debate within the Treasury Department over whether to try to unilaterally make the changes to capital gains. Some political appointees support the idea, while career staffers are more cautious, knowing it has been rejected before.

“The thing is, Trump is so gutsy, he’s doing so many of these things administratively, and he’s the kind of person I could see who would instruct the Treasury to do it,” Mr Moore said. “That would be gigantic with the economy ... there’s a big robust debate going on within the Treasury Department about whether or not to do this. It’s definitely in the mix.”

Mark Mazur, a longtime IRS official who served in a senior role in the Obama administration’s Treasury Department, said the policy change was studied many years ago and was deemed to be outside the bounds of executive authority. Changes of this magnitude are supposed to be written by lawmakers, Mr Mazur said, not decided by administration officials.

It’s unclear whether Treasury could make the decision without any additional input or whether the Justice Department would have to write a legal opinion redefining cost basis.

Mr Mazur is the director of the Tax Policy Centre, which studies fiscal proposals. It recently published an analysis of what indexing capital gains to inflation might mean, and it found that the tax savings could be substantial.

Leonard Burman, an institute fellow at the centre, found that such a change, depending on how it was designed, could cut taxes by up to $20bn (approximately £15bn) for the wealthiest Americans and make it easier for sophisticated investors to create tax shelters.

The Washington Post

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