Washington • Leave it to the Trump administration to push the worst possible way to either stimulate the economy or help the middle class.
Depending on the day (or hour), President Trump either is or isn't worried about the risk of recession. He either is or isn't contemplating ways to stave off such a risk through tax cuts. He either is or isn't contemplating payroll tax cuts specifically.
And he has similarly vacillated on proposals to reduce capital gains taxes. Last Tuesday afternoon, he said he "would love to do something on capital gains"; less than 24 hours later, he told reporters, "I don't want to do that."
Mind you, Trump has been known to turn his flip-flops back into flips before. And one of his top economic advisers, National Economic Council Director Larry Kudlow, has been working to get this particular tax backtrack back on track.
Over the subsequent several days, in a flurry of media interviews, Kudlow declared that Trump was still working on "Tax Cuts 2.0" and had tasked Kudlow with designing the policy. The goal was to juice the economic growth through "additional tax relief for middle-income people, blue-collar people, small business." Among the proposals on the table, per Kudlow: cuts to capital gains taxes.
In one interview, Kudlow said this would take the form of reducing the tax rate on long-term capital gains, which are already taxed at a much lower rate than that for earned income.
But elsewhere Kudlow has mostly focused on his long-standing hobbyhorse: allowing capital gains to be indexed to inflation.
In layman’s terms, here’s what this would mean. Now under the tax code, your profit from, say, a stock sale is calculated by subtracting the price you initially paid from the price you ultimately sold at. In the Kudlow world, you’d instead get to adjust your initial purchase price upward, for inflation. Which generally means the longer you hold the asset, the smaller your calculated profit — and the less tax you owe.
It’s not necessarily a crazy or unfair idea. But it is crazy and unfair if you live in a world — as we do — with a lot of other tax preferences for capital gains income, including those lower rates. Such preferences are there partly to compensate for the fact that we don’t index for inflation.
There are a few other major issues with this proposal.
One is that it would be quite expensive, adding about $100 billion to deficits over the next decade, according to an estimate from the Penn Wharton Budget Model.
Another is that it would almost exclusively benefit the tippy-top of the income distribution. Rich people, after all, have the most investment income. According to the same Penn Wharton Budget Model study, the top 1% of households would receive about 86% of the benefits from capital gains indexing.
Scrooge McDuck himself couldn't design a more plutocratic policy.
Yet another problem is that it would have scant effect on the economy. Which makes sense: It's hard to imagine how offering a huge windfall for investment decisions made, say, 40 years ago — back when inflation was high — is going to spur a lot of new economic activity today. It's not as if people can go back in time and buy more Coca-Cola stock.
The generally pro-tax-cut Tax Foundation estimated that capital gains indexation would boost the long-run size of the economy by 0.11%. The Penn Wharton Budget Model estimates "that indexation spurs roughly zero net additional economic growth" over the 10-year window it examined.
Finally, there's a legal problem, as there's no way Trump could get the Democratic-controlled House to pass such a tax cut.
Both Kudlow and Trump have argued that the president could circumvent Congress through unilateral, administrative action. Republican senators, who once fearmongered about presidential tyranny, have urged him to do so.
But the Justice Department has already looked into whether such an executive fiat would be legal. Its determination was an unequivocal "no."
"The question was clear: Can we, simply through administrative action, index capital gains?" the attorney general said at the time. "And not only did I not think we could, I did not think that a reasonable argument could be made to support that position."
You know who said that? Trump's own Attorney General William Barr, back during his first go-round as A.G. — under then-president George H.W. Bush.
But, hey, other than fairness, cost, targeting, economic impact and Trump's own attorney general declaring the policy illegal, it sounds like a terrific idea.
Catherine Rampell
Catherine Rampell’s email address is crampell@washpost.com. Follow her on Twitter, @crampell.
