The Trump administration has come up with a shameless and probably illegal way to deliver hundreds of billions in further tax cuts to the richest Americans. Allow taxpayers to adjust capital gains for inflation, and thereby pay a far lower tax.
They plan to do this by administrative fiat if they can’t get Congress to bite.
The move was discussed by the Bush administration, and was rejected as probably illegal. Only Congress can revise the tax code. But with the current Supreme Court, you never know. Anything goes.
Here is a dirty little secret for progressives to consider. As we demonstrated in our special issue on the tax cut, virtually all of the provisions of that cut, which Republicans jammed through Congress on a straight party-line vote, are unpopular. Republicans simply got too greedy and delivered nearly all of the benefits to the rich.
But as much as I hate to say it, this capital gains scam might be popular with the upper middle class, including many Democrats. Why? Because your typical $100,000 income family has most of its net worth in the family house.
And because of the inadequacy of pension plans in this country, the typical retirement plan includes selling the family home and downsizing. Do the arithmetic. You bought a house in 1988 for $150,000. Thanks partly to the run-up in housing prices, it’s now worth $650,000. So you are stuck paying a capital gain on $500,000.
But adjust that for inflation, and the taxable gain is more like $200,000. Pretty tempting. Lots of $100,000 families are far from “rich,” and many are Democrats. The Republicans may have backed into something politically clever.
Here’s a better way. Before recent rounds of tax “reform,” the system used to provide that you only paid capital gains tax in the case of a house on the difference between the value of the old house and the value of the new one, if the new one was worth less. That’s far better policy.
It would provide even more of a break to downsizing longtime homeowners. It also has the virtue of just targeting housing, as opposed to giving the same inflation break to owners of stocks and bonds, the vast majority of whom really are rich.
Democrats take notice. Let’s hope the courts find the administration’s gambit illegal, but it’s a seductive idea that may come before Congress, and it might even peel off some Democratic votes unless Democrats have a better alternative. You can’t beat something with nothing.