Republicans happy to let Treasury pursue $100 billion tax cut
Congressional Republicans are rallying behind potential executive action by the Treasury Department to reduce capital gains unilaterally.
With Congress unlikely to pass related legislation anytime soon, GOP lawmakers expressed interest in having the Treasury Department take the lead, a day after The New York Times reported that Treasury Secretary Steven Mnuchin said he’s considering doing so.
“There’s no question it’s good policy economically,” said Sen. Pat Toomey (R-Pa.), who has co-sponsored legislation on the topic.
Implementing the cut would reduce the amount of money subject to capital gains taxes and result in an estimated $100 billion tax cut, mostly for wealthy individuals.
“If it can’t get done through a legislation process, we will look at what tools at Treasury we have to do it on our own and we’ll consider that,” Mnuchin told the Times. “We are studying that internally, and we are also studying the economic costs and the impact on growth.”
GOP lawmakers, as well as prominent outside conservatives, have said it’s important to end capital gains taxes on inflation because the current formula leads to people paying taxes on investment gains they didn’t really receive.
“If [the administration has] got the authority to do it, they ought to do it, because I’m an advocate for indexing,” said Sen. Chuck Grassley (R-Iowa), who serves on the Senate Finance Committee. “Otherwise, you’re taxing inflation and that’s phantom income. You only want to tax real income.”
Republicans also argue that the change would make it easier for people to sell investments and incentivize people to make new investments.
“It is a policy that would encourage economic growth and increase jobs,” Sen. Ted Cruz (R-Texas) told reporters Tuesday, adding that he’s “encouraged the administration to go forward with it.”
Legislative proposals have been offered in recent months to index capital gains — in the Senate by Toomey, Cruz and Sen. Jim Inhofe (R-Okla.), and in the House by Rep. Devin Nunes (R-Calif.).
Lawmakers are also discussing adding legislation to index capital gains as part of a second round of tax cuts the House plans to vote on this year, though no such provision was included in a document about “tax cuts 2.0” released last week.
The chances of capital-gains cuts becoming law through legislation in the coming months are slim since Republicans would need the support of some Senate Democrats, who are opposed to the effort. That leaves executive action as the more likely vehicle for any change in the short-term.
A spokesman for Nunes said Tuesday that the California Republican supports Treasury indexing capital gains through executive action, and that the congressman thinks Treasury has the authority to do so.
House Ways and Means Committee Chairman Kevin Brady (R-Texas) told reporters last week that he hasn’t fully researched the issue of whether Treasury can unilaterally implement a capital gains tax cut, but said he thinks “we ought to look at not penalizing Americans for inflation.”
One of the biggest challenges to Treasury acting on its own is the debate over whether the department has the legal authority to index capital gains.
“My understanding is there’s serious legal analysis supporting their ability to act unilaterally,” Cruz told reporters.
Some conservatives say Treasury’s authority stems from a 2002 Supreme Court ruling that found that the term “cost” is ambiguous. Democrats have pointed to opinions from Treasury and the Justice Department from 1992 that indicate executive action cannot be used to index capital gains.
Republicans could also face political challenges if Treasury institutes the tax cut ahead of the midterm elections; indexing capital gains is estimated by the Penn-Wharton Budget Model to largely benefit the wealthy and lower federal revenues by $100 billion over a decade.
Democrats argue that it would exacerbate the deficit impact of the tax-cut law Trump signed last year.
“The idea that they would consider doing this after they put $2 trillion on the national credit card, largely to help folks at the top, is slap-your-forehead kind of stuff,” said Sen. Ron Wyden (Ore.), the top Democrat on the Finance Committee.
Ways and Means Committee ranking member Richard Neal (D-Mass.) said in a statement Tuesday that “such a move would be irresponsible, legally dubious, and add to the mountain of debt created by the first Republican tax cut.”
Republicans counter that Democrats will attack the GOP as supporting tax cuts for the rich regardless.
“The Democrats are going to say that every day of the week, several times a day, every week of the year, no matter what we do or don’t do,” Toomey said. “So I say, let’s do what’s great for the economy.”
Sen. Ron Johnson (R-Wis.) agreed that indexing capital gains would help the economy.
“It actually would be a good thing to do. It helps promote more capital formation,” said Johnson, who favors ending capital gains taxes on inflation and then taxing capital gains at the same rates as ordinary income.
Some conservative groups argue that a capital gains cut wouldn’t add to the deficit, at least not in the short run, because it would boost the economy and cause more people to sell investments that they’ve held for years. People pay capital gains taxes only when they sell investments.
Americans for Tax Reform President Grover Norquist predicted that Treasury would issue executive action to index capital gains before the midterm elections because of the economic benefits.
“This is a huge strengthening of the American economy,” he said.
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