Trump Administration Mulls Over Change In Tax Code
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The Trump administration is considering another big tax cut, this time on capital gains. The move would benefit primarily the wealthiest Americans. Treasury Secretary Steven Mnuchin told The New York Times that if Congress won't cut taxes on capital gains, the administration might try to do so on its own. NPR's Scott Horsley reports.
SCOTT HORSLEY, BYLINE: Capital gains taxes are what you pay when an investment makes money. So you buy some stock for $100, hold it for a decade, then sell it for $500. Your profit or capital gain is $400. And that's the amount you pay taxes on. Of course, during that decade, inflation would have nibbled away at that profit. So the $400 is worth less than it was 10 years earlier. The administration is considering a plan to take that inflation into account. So investors would report a smaller capital gain - on average, about a third less - and they'd be saddled with a smaller tax bill.
STEPHEN MOORE: It's not fair for the government to tax someone on a gain that really is just due to inflation.
HORSLEY: Stephen Moore is an economist at The Heritage Foundation and a former adviser to the Trump campaign. He says many investors now feel locked into holding assets they might otherwise sell just to avoid paying an inflated tax bill. Moore likes the idea of taxing only capital gains that are over and above the rate of inflation.
MOORE: You would see a lot of people selling their assets and then moving into more productive assets. And we believe this would lead to unlocking potentially trillions of dollars that could be redeployed in higher and more productive assets.
HORSLEY: But the change would carry a big price tag for the federal government. The Treasury would lose up to $20 billion a year in capital gains tax payments if investors were allowed to subtract inflationary gains. Len Burman, the co-founder of the Tax Policy Center, says those savings would overwhelmingly go to people at the very top of the income ladder.
LEN BURMAN: More than three-quarters of capital gains tax were paid by people with incomes over a million dollars, and virtually all of it is paid by people with incomes over $100,000.
HORSLEY: The wealthy were also the biggest beneficiaries of last year's GOP tax cut. And Burman says people who make their money off investments already get favorable treatment under the tax code compared to those who rely on wages and salaries.
BURMAN: Capital gains are already taxed at a lower rate than other income, so you'd be adding a tax break on top of another very, very big tax break, one of the biggest in the code.
HORSLEY: Fiscal watchdogs are also concerned about any change to the tax code that reduces revenue at a time when the federal government is awash in red ink. Maya MacGuineas, who heads the Committee for a Responsible Federal Budget, notes the federal deficit is expected to top $1 trillion next year thanks to the big tax cut passed last year and a surge in new government spending.
MAYA MACGUINEAS: Right now, it's a period of fiscal free-lunchism where nobody's talking about paying for anything. And people keep dangling new goodies and trying to ignore this huge mountain of debt.
HORSLEY: The Treasury Department is reportedly studying whether it could implement the capital gains tax cut on its own simply by changing some definitions in the tax code rather than looking to Congress. Previous administrations have shied away from that step, which Burman says would be sure to invite a legal challenge.
BURMAN: Congress has had 100 years to define capital gains as adjusted for inflation, and they've never chosen to do it. The reason is that it costs a lot of money and probably because it's regressive. It doesn't look good to give such big tax cuts to super wealthy people.
HORSLEY: Burman acknowledges that a reduced capital gains tax might grease the economy's wheels a bit and make it somewhat more efficient. But he's doubtful that would begin to offset the costs. Scott Horsley, NPR News, Washington.
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