By Kimberley A. Strassel
What if President Trump had the authority—on his own—to enact a second powerful tax reform? He does. The momentum is building for him to use it.
In the halls of Congress, the corridors of the administration, and the nerve centers of activist groups, forces are aligning behind a plan: a White House order to index capital gains for inflation. It’s a long-overdue move—one that would further unleash the economy and boost GOP election prospects. And Mr. Trump could be the president bold enough to make it finally happen.
At President Reagan’s behest, Congress in the 1980s indexed much of the federal tax code for inflation. Oddly, capital gains weren’t similarly treated. The result is that businesses and individuals pay taxes on the full nominal amount they earn on investments, even though inflation eats up a good chunk of any gain. It’s not unheard of for taxes to exceed real gains after inflation. The result is significant capital distortion, as companies sit on buildings and property or investors sit on stock—rather than selling and thereby putting both assets and gains to more productive use.
Conservatives have understood this problem for decades, yet for decades they have been held hostage to a 1992 government brief. The paper by the Justice Department’s Office of Legal Counsel offered a few faulty arguments as to why the Treasury lacked the authority to make this regulatory change. Neither President Bush questioned it, but others have.
Americans for Tax Reform President Grover Norquist—chief troop-rallier in this effort— has been circulating a 2012 paper by lawyers Chuck Cooper and Vincent Colatriano that details that 1992 opinion’s flaws. It points out that the Internal Revenue Code does not require that the “cost” of an asset be measured only as its original price—meaning there is no reason Treasury could not construe it in today’s dollars. More important, it noted that since the Supreme Court decision in Verizon Communications v. Federal Communications Commission (2002), regulators have leeway in how they define “cost.”
“Every Republican I’ve talked to says it is powerful public policy,” says Mr. Norquist. “Some had this vestigial memory of a negative memo. But once they actually read the memo, they understood there is no legal obstacle, and the support for this within the Congress, within the White House, within the Treasury, has just exploded.” Mr. Norquist notes that part of the attraction is that all Treasury has to do is issue a definitional regulation—no lengthy rulemaking required.
What’s new of late is the growing, and powerful, backing. Senate heavyweights Ted Cruz and Pat Toomey had already this year introduced a capital-gains indexing bill, and House Republican Devin Nunes tells me that he is next week introducing his own, though he believes “the administration could implement [the change] under its own authority.” House Freedom Caucus Chairman Mark Meadows on Thursday sent a letter to President Trump encouraging Treasury to put the change in place by Oct. 1. Mr. Trump’s top economic adviser, Larry Kudlow, wrote a column last year calling on the president to “spark a wave of prosperity” with an indexing order. Vice President Mike Pence pushed this issue in 2006 when he was still in Congress. And dozens of outside groups, from ATR to Club for Growth to the National Federation of Independent Business, are pushing to end the “inflation tax.”
Treasury Secretary Steve Mnuchin recently told this newspaper that he’d like Congress to move on indexing, but that if it was a no-go, his department would “decide whether we want to consider this on a nonlegislative basis.” That’s notable, because Republicans can’t get 60 votes for this in the Senate. Democrats on the Senate Finance Committee, led by Oregon’s Ron Wyden, have already sent a letter to Mr. Mnuchin warning against regulatory indexing, previewing that they’d oppose it as a giveaway to the “wealthy” and a hit to the deficit.
So, nothing new—though the left’s deficit argument here is flimsier than usual. Indexing is a de facto cut in the capital gains tax, and every capital gains tax cut in modern history has resulted in a rise in capital gains revenue. The move would set off an explosion of buying and selling—of which the government would get its cut. The lower tax on capital would also help asset prices grow.
All of this would be excellent news for the economy, but also for those workers who were stung by the recent tax reform’s limit on state and local deductions but might now see some alternate tax relief. All in time for the midterms. All it takes is a simple order. A President Trump who has so confidently wielded his authority to cut down regulation should have no issue wielding it to cut down an outdated, decades-old legal memo that is holding back the economy and unfairly burdening investors—small and big alike.