The Trump administration might go around Congress to cut taxes on investors, a proposal that looks a lot like a giveaway to the rich.
Treasury Secretary Steve Mnuchin told The New York Times this month that his agency might unilaterally change the tax treatment of capital gains, an idea that conservative policy wonks have long supported.
But during the debate over the tax bill that became law last year, Republicans insisted they weren’t out to benefit the elites that President Donald Trump trashed during his 2016 campaign.
“The rich will not be gaining at all with this plan,” Trump said in September as congressional Republicans started drafting their tax cut legislation.
The plan ultimately benefited the richest 5 percent of taxpayers more than any other group, according to an analysis by the independent Tax Policy Center. Republicans could still say that the tax code is at least as progressive as it used to be, since rich people paid much higher taxes in the first place and the new law also cut taxes on lower earners.
But cutting taxes on capital gains doesn’t have the same ambiguity.
A capital gain is the difference between the price of an asset (such as stock) when somebody buys it and its higher value when the person sells it. The Treasury Department proposal would reduce capital gains taxes by adjusting the original price for inflation, thereby shrinking the amount of the gain subject to tax.
Since rich people have a disproportionate amount of capital gains income, they would benefit most from the policy change. One analysis earlier this year from the Penn-Wharton Budget Model found the wealthiest 1 percent of households would reap 86 percent of the benefit and that the change would cost roughly $100 billion over 10 years.
Mnuchin said he would prefer if Congress moved first, but that seems highly unlikely. Rep. Kevin Brady (R-Texas), one of the lead authors of the tax bill, said the Trump administration should go ahead with the change. A Treasury spokesperson declined to comment.
Republicans have frequently proposed indexing capital gains to inflation in past legislation, but didn’t touch capital gains in their most recent law. The George H.W. Bush administration concluded in 1992 that it couldn’t legally go around Congress on the matter. If the Trump administration decides to do so unilaterally, they are likely to face a challenge in court.
Senate Judiciary Committee Chairman Chuck Grassley (R-Iowa) said he didn’t know if the president had the authority to unilaterally cut capital gains taxes.
“If they have the authority to do it, they ought to do it,” Grassley told reporters on Capitol Hill on Tuesday.
Conservative boosters of the proposal say it would benefit everybody by spurring economic growth, which was essentially the same argument they made for the GOP tax law.
“If you want to grow the economy, you have to incentivize businesses to invest, and this certainly would help that,” Sen. Ron Johnson (R-Wis.) said of the Trump administration’s reported proposal.
The Tax Cuts and Jobs Act cut income taxes across the board, but its core provision slashed the corporate tax rate from 35 to 21 percent. Republicans said workers would ultimately get higher wages from increased corporate investment spurred by the new law. Despite a smattering of bonus announcements in January and February, however, wages have remained flat so far this year.
“By claiming that indexing capital gains will expand American investment and workers’ wages, the Administration is just issuing another check it cannot cash,” Sen. Ron Wyden (D-Ore.) said in a May letter to Mnuchin.
Congress previously set the top tax rate for capital gains at 20 percent ― far lower than the top rate for ordinary income, which is now 37 percent ― partly to compensate for the fact that the basis of a capital gain is not adjusted for inflation, said Mark Mazur, director of the Tax Policy Center, a joint project of the Brookings Institution and the Urban Institute.
“So it’s kind of weird that now you say, ‘Oh no, that’s not good enough, we want another adjustment,’” Mazur said.
Before the tax law passed, Mnuchin said it would be difficult not to cut taxes on the wealthiest households as part of reform ― contrary to statements from Trump.
“When you’re cutting taxes across the board, it’s very hard not to give tax cuts to the wealthy with tax cuts to the middle class,” he said in October.
Democrats are likely to use another tax cut benefitting the rich to hammer Republicans on the campaign trail. They need to pick up 24 seats in the House of Representatives in order to take control ― and an unpopular proposal such as cutting taxes for the wealthy would put GOP candidates on the defensive.
“This is just another example of the Trump administration pretending they’re supporting working families when they’re just giving another handout to the rich,” said Sen. Chris Van Hollen (D-Md.), who chairs the Democratic Senatorial Campaign Committee, the group dedicated to electing Democrats to the Senate.