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The capital gains tax cut: Like taking candy from a baby

The capital gains tax cut: Like taking candy from a baby
© Greg Nash

The Trump administration is considering redefining “cost” for capital gain tax purposes from the price paid for the capital asset to the price of the asset adjusted for inflation when the asset is sold. The net result: investors would pay considerably less in taxes because, after adjusting for inflation, the price of the capital asset will be higher than the actual dollar price paid for the asset.   

Secretary Steven MnuchinSteven Terner MnuchinOn The Money: Mnuchin to attend anti-terror meeting in Saudi Arabia | Treasury releases guidance on 'opportunity zone' program | Maxine Waters gets company in new GOP line of attack Mnuchin to attend anti-terror meeting in Saudi Arabia following Khashoggi disappearance Treasury releases guidance on 'opportunity zone' program created by Trump tax law MORE reportedly has directed the Treasury Department to evaluate whether it can so change the definition unilaterally — that is, without congressional action. Following these reports, the New York Times published an editorial, “Trump’s Crony Capitalists Plot a New Heist.”

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The Times notes that the extraordinarily wealthy members of the Trump administration will benefit from this new tax break far more than will average middle-class Americans. Those individuals include Mnuchin himself, fellow cabinet members Commerce Secretary Wilbur RossWilbur Louis RossSessions attacks judge who ordered officials to sit for depositions in challenges to Census citizenship question Harris accuses GOP of ‘weaponizing’ 2020 Census DOJ: Commerce chief spoke with Bannon, Sessions about census citizenship question MORE and Education Secretary Betsy Devos, and, of course, the Trump family. What the otherwise excellent editorial neglects, however, is who is being robbed in this potential “heist.” The answer to this all-important question is our children.

 

For years, one of the main rallying cries of many Republicans has been the federal deficit. Once the Republicans gained control of Congress and the White House, and were in a position to act on the deficit, they ran the other way. As we all know, in December 2017, Republicans passed a $1.5 trillion tax cut bill without a similar cut in spending. The Congressional Budget Office projects that massive tax cut will cause our annual budget deficit to rise to over $1 trillion dollars by 2020 and $12 trillion over 10 years, taking the country’s debt to about 96 percent of gross domestic product by 2028. At that level, the debt likely will be a wet blanket on the economy.  

Redefining cost for capital gains purposes equates to another $100 billion tax cut with no comparable spending reduction, further adding to our deficit. But there is no free lunch in this world. Everything has a price — everything. Someone, at some point in time, in one form or another, will have to pay for the tax cut ... and that someone almost certainly will be our children.

Indeed, as our federal debt continues to explode, the government will have to service the debt in the form of higher interest payments. That, in turn, will mean a combination of higher taxes in the future and reduced government spending on essentials such as infrastructure, education, research and development, military and other investments that help fuel economic growth. This will lead to lower wages and standards of living, and will reduce the ability of our government to respond to crisis situations.   

Unquestionably, the additional $100 billion per year is only a small fraction of the $21 trillion national debt. But as the late Sen. Everett Dirksen is credited with saying (whether true or not):  “A billion here, a billion there, and pretty soon you’re talking real money.”

If the administration proceeds with this shortsighted policy, it unquestionably will attempt to justify it by arguing that average Americans who invest in the stock market will benefit, and that it will stimulate further economic activity — at times, a legitimate reason for a tax cut without a reduction in spending. On the former point, independent analysis shows that the vast majority of the benefit goes to the super rich. On the latter point, Keynesian economics would dictate that with a current strong economy, now is the time to begin to reduce our debt, not add to it. Adding to the deficit through a non-legislative fiat is not only bad policy, it is just plain wrong.   

How would we explain this tax cut to our children? Surely we would not say to the average high schooler: “Please understand that to largely improve the lifestyle of the rich and famous and increase the inheritance of their kids, we are implementing this $100 billion tax cut. Of course, someday you, my child, will have to pay it back with interest, and it will negatively affect your quality of life. But we appreciate your willingness to lend us your money.”

We might add: “We’re also glad you have no say in the matter because you are not old enough to vote. Nonetheless, thank you for your generosity.”

Gary A. Garfield is the retired chairman, president and CEO of Bridgestone Americas Inc. He practiced law for 29 years and was the general counsel and chief compliance officer before leading the company.