Don't Mess With Taxes

A week ago, the idea of indexing capital gains was just that, an idea.

To move forward, the best bet was for the proposal to make it into Tax Reform 2.0. It didn't.

So now it's looking more likely that the U.S. Treasury might act unilaterally.

Treasury Secretary Steve Mnuchin had previously (all the way back in late June) said that he would prefer Congress take the lead on indexing capital gains.

He did add, however, that "If we're not able to complete Tax Reform 2.0, then we'll go back to the drawing board and decide whether we want to consider this on a nonlegislative basis."

Now Mnuchin apparently has pencil in hand and is stepping up to the drawing board.

Tough legislative tax path: Rep. Kevin Brady (R-Texas), head of the tax-writing House Ways and Means Committee, apparently wants Treasury to take the lead.

"I think we ought to look at not penalizing Americans for inflation," said Brady, who added that he would like to see the Treasury Department make the change through regulation.

The main reason Brady seems to be abdicating his tax-related legislative duties is that it's going to be nigh impossible to get Tax Reform 2.0 changes, which are aimed at more middle-income voters taxpayers, into law.

Those changes might clear the House before the Nov. 6 midterms, but they are not likely to pass in the Senate where the Republicans' slim majority leave no margin for error.

Plus, during creation of the Tax Cuts and Jobs Act (TCJA) last year, a House capital gains provision didn't survive negotiations with the Senate.

Rewarding the richest: So if the GOP really wants to reward investors, especially the really wealthy ones (as noted in the Tax Policy Center graphic below) who would benefit from inflation indexing of capital gains, a regulatory fix is the best chance for enactment of this tax change.

True, the change would benefit more than just the very rich. Take the hubby and me, for example.

If we sell one of our holdings for $200,000 that we bought 20 years ago for $20,000 we'd owe tax on our profit of $180,000.

Yes, money savvy readers, this is a simple example. For ease of illustration, I'm not taking into account the various factors that could add to our purchase price and make our adjusted basis bigger, thereby by lowering our taxable capital gains.

At the TCJA's 15 percent rate for our income and filing status, in this simple example we would have to send $27,000 to the Internal Revenue Service, making our net $153,000.

I'll take that. But I'd also take more if capital gains were indexed.

Savings.org's inflation calculator says my 20 grand from 1998 would be worth $30,567. That means we'd then owe inflation adjusted tax on $149,433. That would give us a tax bill of $22,415 or $4,585 less than without indexing.

More money, more taxes collected or not: Of course, if you increase the amounts the savings would be larger, especially for those folks in the very top of the income strata. That's because they'd be paying the highest 20 percent capital gains tax rate as well as the 3.8 percent surtax.

Taking all that into account, the TPC's Len Burman says indexing capital gains would cut capital gains taxes by up to $20 billion a year.

That's a lot of revenue for Uncle Sam to forgo at a time when our deficit is projected to top $1 trillion by next year.

Plus, the change also would, notes Burman, open the door to a raft of new, inefficient tax shelters and "would do all this without the approval of Congress."

Try, try again: Easing capital gains taxes has been long been a Republican Party goal. And Congress has been trying to do that for, well, forever.

As for indexing capital gains, that also is not new.

Forty years ago, the Revenue Act of 1978 included a capital gains indexation provision. However, it was stripped from the final bill.

Still, lawmakers kept trying, as noted in an examination of such legislation by Americans for Tax Reform, the anti-tax group founded by Grover Norquist.

Hopes were raised by Donald J. Trump's unexpected election. With the White House, Senate and House in Republican control, the opportunity to finally make capital gains changes seemed possible.

For supporters of investment tax changes, it was — and for now, still is — just out of legislative reach.

Hence the shift to change by Treasury mandate, which itself isn't a new idea. It was considered during President George H. W. Bush's term.

The Treasury looked into that possibility in 1992 and determined that it didn't have the authority to change the rules without Congressional action.

Bad timing: The problems with getting any tax legislation through the House and Senate obviously is the main reason GOP lawmakers are looking to Treasury to do their jobs.

Being able to sidestep responsibility for the aforementioned deficit also obviously appeals to lawmakers.

But there are other possible reasons for putting capital gains indexing in Mnuchin's hands.

One is that the Administration already is seeing indications that the third quarter economic numbers, which will be released just before voters go to the polls in November, will not be as rosy as they predicted immediately after the second quarter's gross domestic product (GDP) increase of 4.1 percent.

If those figures are a dud, it's possible they could prompt more voters to vote for Democrats, producing and/or guaranteeing the Congressional losses that the GOP already is fearing. That would doom future short-term hopes of more tax law changes that benefit higher earners.

Other election concerns also could be a factor.

Even if Trump wins in 2020, he'll be a lame duck. Second presidential terms are not known for getting anything of consequence done. Plus, Mnuchin won't be Treasury Secretary forever.

So the thinking is that now is the time to act.

Politics on both sides: Finally, there's the political potential.

I know. I can see your skeptical, slightly confused look across the intrawebz. Any political advantage goes to Democrats, right?

Yes, the Dems definitely will use capital gains indexing as a campaign message. The current tax law already is getting mainly "meh" reviews from most Americans. Any GOP-promoted change that benefits the wealthy will give Democrats another tool to play up tax and economic inequities.

Sen. Brian Schatz, Democrat representing Hawaii, took to social media to warn that the GOP capital gains indexing proposal is a rip-off.

But Republicans have a narrow opening here, too, especially with the no-tax component of their core supporters. It's provided by the aspirational nature of our country.

As amazing as it seems to all us practical pragmatists out there, many other folks believe that they one day will be millionaires.

"Less than 1 in 20 American households has a million dollars, but 2 in 10 Americans believe they'll become a millionaire in the next decade, according to a new AP-CNBC poll," noted Laura Clauson in a post back in 2011 for the progressive blog Daily Kos.

OK with possible future tax breaks: The appeal of extreme wealth and belief/delusion that it's attainable is one reason that so many supported and still cheer on Trump.

These folks continue to believe that one day they also will be part of the lofty, and derided until they are members, elite. And when that happens, they'll want to pay low capital gains taxes, too.

I know, I'm shaking my head, too. But the current Oval Office occupant managed to merge the American Dream and our country's obsession with celebrity and make the alliance work last November.

He and his ultra-rich Administration members are still making it work, with supporters believing Trump is indeed draining the D.C. swamp.

So don't dismiss their ability to continue to spin things when it comes to indexing capital gains taxes.

You also might find these marriage related posts of interest:

• Harvesting capital gains and future tax savings
• Take advantage of tax-smart philanthropy by donating appreciated stock
• Capital gains taxes for 2017 returns, under the new law and in light of the crazy stock market