Editorial: The Trump administration’s latest tax scheme is its worst yet

The Trump administration is considering using the Treasury Department’s regulatory authority to cut capital gains taxes unilaterally, a move that would almost exclusively benefit the wealthiest 10% of U.S. households even as the annual federal budget deficit — not just the accumulated debt — surges well past $1 trillion.

Previous Republican and Democratic administrations toyed with the same idea before concluding that it would be unlawful — the Treasury Department’s authority just doesn’t stretch that far. So, too, has the proposal been debated and batted down by multiple Congresses. If the enormous and growing budget deficit won’t deter the president from showering wealthy Americans with more tax breaks, let’s hope that the law will.

The administration isn’t alone in seeking tax cuts while the economy is in full bloom. House Republicans have their own, costlier plan. But while the White House is mulling an actual raid on the Treasury, the House proposal appears to be aimed at gaining political points.

The House Ways and Means Committee recently unveiled a three-part framework for tax cuts, giving GOP members something to tout to their constituents as the midterms approach. Two of the three elements — proposals to start-up businesses and promote savings for retirement and other needs — could be worthy additions to the tax code, if their costs were offset by other changes that increased revenue. And their benefits might actually reach middle-class taxpayers, not just high-income ones.

The third element of the committee’s framework — making the temporary tax cuts for individuals and pass-through businesses permanent — has none of those attributes. It’s too expensive (an estimated 10-year cost of $600 billion), the benefits flow disproportionately to upper-income Americans, there’s no economic justification for the cuts, and the special treatment for pass-through businesses encourages taxpayers to game the system.

While House Republicans have shown no compunction about passing budget-busting tax bills, it’s not clear there’s a majority in the Senate for them; at least two Senate Republicans have said they won’t vote for another tax bill that raises the deficit. But actually changing the tax code doesn’t seem to be the real point of the House’s effort. The sudden emergence of the three-part proposal and the rush to pass it suggest that the goal of the exercise is to gin up an issue for the fall campaign.

Whether it’s a winning issue is another question entirely. Voters should ask the House members who supported the measure why they are so intent on burying the federal government in debt.

Over at Trump’s Treasury Department, tax lawyers are examining whether the department could trim capital gains taxes by adjusting the gains’ value for inflation. Under current law, stock bought for $10,000 in 2000 and sold for $20,000 in 2017 would have a taxable gain of $10,000. But adjusting for inflation would raise the value of the stock from $10,000 to $14,600, cutting the gain almost in half.

By reducing the tax penalty faced by investors, supporters say, the move would induce more people to sell long-held investments and make more capital available for new and expanding businesses. That, in turn, would promote economic growth.

This is a major policy shift, however, not an administrative tweak. And Congress has debated it repeatedly, rejecting the idea time and again because of the complexity it would add to the system. Instead, lawmakers have either excluded a portion of the gains from taxation, cut the rate at which gains are taxed, or both. In other words, Congress has already chosen a different means to address the ostensible problem that indexing capital gains for inflation would solve.

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That’s all the more reason the courts would frown on the power grab the administration is mulling here. But there’s a fairness argument against making such a change too. As a new report from the nonpartisan Congressional Research Service points out, economic modeling shows that 95% of the tax cut from indexing would go to households in the top 5% of U.S. incomes. Put another way, indexing capital gains would do virtually nothing for 95% of U.S. taxpayers, while raising the incomes of the top 0.1% by 1% to 3%.

One can only imagine how that sort of feed-the-rich move will play with the farmers whose exports are being strangled by Trump’s trade war.

Treasury Secretary Steven T. Mnuchin has said he hasn’t yet answered the question whether his department can and should index capital gains by regulation. But the answer should be obvious. It’s no.

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