You’d think that as a baseline, we would expect the president of the United States not to do clearly stupid things. And yet when President Trump decides not to follow atrocious advice from Senate Republicans and refrains from doing something fiscally reckless and divisive, I feel like tweeting a big “Job well done!” gif to @realDonaldTrump.
I guess you celebrate whatever wins you can get.
At issue here is a push by 21 GOP senators to persuade Trump to cut capital gains taxes unilaterally. Specifically, they wanted Trump to instruct the Internal Revenue Service to change how gains are measured when stocks, real estate or other assets are sold. Instead of calculating the gain (or loss) by subtracting the price paid for the item from the amount it eventually sold for, the senators argued, the purchase price should first be adjusted for inflation, shrinking the gain or magnifying the loss.
If you would design a tax system from scratch, you’d probably do that. “Indexing” gains for inflation protects investors from being taxed on gains that inflation evaporated.
But indexing isn’t the only way to address that issue. You could also tax gains at a lower rate than ordinary income. You could also “step up” the value of assets passed on from one generation to the next, meaning all the gains up to the moment the original investor died will never be taxed. And you could refrain from indexing the interest expenses people incur when they borrow money to buy assets. Congress has chosen to do all of those things.
What Congress has explicitly chosen not to do, however, is index gains. And lawmakers have made that choice repeatedly, despite multiple opportunities to go that route.
That should be the end of the story, given that Congress, not the president, makes tax policy. Beyond that, the Justice and Treasury departments both looked at the administration’s authority to start indexing on its own initiative, and declared in 1992 that it does not have that power.
Even more important, with the federal deficit hitting $1 trillion with a month left in the fiscal year, and trillion-dollar deficits projected for at least the rest of Trump’s term, Washington can’t afford to cut taxes again. And despite the claims of proponents, there’s no evidence to suggest that this particular cut would boost investment, savings or innovation. Instead, the vast majority of the benefits would flow to the highest-income Americans, the ones least in need of it.
Yet it wasn’t until Wednesday afternoon that Trump finally rejected the idea — and only for the time being. CNBC offered this explanation from White House spokesman Judd Deere: “President Trump was thoroughly briefed on the complex economic, legal and regulatory issues, and concluded that at this time he does not feel enough of the benefits will go to the middle class.”
That’s a purely political explanation. Note that the White House didn’t express any qualms about the possible abuse of presidential authority. And if Trump really wanted to boost economic growth in the short term — which seems to be his obsession, given his continued hammering at the Federal Reserve — he would be focused on how much of the benefits of the tax cut went to the working class and the poor. Those folks are the ones most likely to spend any tax-cut windfall and stimulate the economy. But then, if that were the goal, you wouldn’t cut capital gains taxes; the percentage of folks with incomes at or below the U.S. median who report taxable gains is in the low single digits.
But I quibble! Indexing gains unilaterally is a terrible, terrible idea. The president did not step into that trap, and for that we should all be grateful. Even if it’s the sort of level-headed decision we should expect a president to make, day in and day out.