WASHINGTON—The Trump administration is considering a change to the capital gains tax, a move that would benefit investors. While Democrats have bashed the plan, some experts have applauded the effort and are urging the government to stop penalizing savings with high taxes.
This change will be a “major plus” for investors, encouraging them to invest more in the United States, said Lewis Walker, a financial planning and investment strategist at Capital Insight Group.
“Money goes where it’s best treated,” he said. “It goes somewhere else because we’re now in a global market. This was the problem we had before.”
The Treasury Department is working on a plan that will allow taxpayers to account for inflation in calculating capital gains tax liabilities. Indexing the asset basis to inflation will increase the initial value of an asset, such as property or stocks, resulting in a lower tax bill at the time of sale.
Under the current rules, the government basically penalizes savings, Walker said.
“Money moves all around the globe,” he said. “The more you penalize money and penalize savings, the less you get of it, and that’s not a good thing for the economy.”
The Treasury Department is currently studying the economic impact of the plan and examining whether it could use regulatory powers to enact the change.
“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,” Treasury Secretary Steven Mnuchin told The New York Times.
“We are studying that internally, and we are also studying the economic costs and the impact on growth.”
A research report published by the University of Pennsylvania’s Wharton business school found that adjusting capital gains for inflation would reduce individual tax revenues by $102 billion over the next decade.
“While high-income households would benefit most, the share of taxes paid by adjusted gross income would not change meaningfully,” stated the report.
Senate Minority Leader Chuck Schumer (D-N.Y.) criticized the plan, saying it is an “outrage” to give a tax benefit to the wealthiest people.
“At a time when the deficit is out of control, wages are flat, and the wealthiest are doing better than ever, to give the top one percent another advantage is an outrage and shows the Republicans’ true colors,” he said.
“Mr. Mnuchin thinks he can do it on his own, but everyone knows this must be done by legislation. If this proposal were to be considered in the Congress, it would not pass.”
Republicans have been pressing for low capital gains tax and recently Rep. Devin Nunes (R-Calif.) introduced a bill in the House of Representatives to stop taxpayers from paying capital gains taxes on inflation. Similarly, Sen. Ted Cruz (R-Texas) introduced in April a bill titled the Capital Gains Inflation Relief Act of 2018. Both proposals allow investors to adjust asset cost basis for inflation.
Republican lawmakers want to include the change to capital gains tax as part of the tax reform plan 2.0 that the House is planning to vote on in September.
Adjusting capital gains tax for inflation would be “commonsense reform,” according to the Tax Foundation, an independent Washington policy group.
“Inflation-related gains do not represent an actual growth in wealth over time,” Alec Fornwalt, a policy analyst at the Tax Foundation, stated in a report.
The proposal will allow taxpayers to be taxed on real increases in income, instead of nominal increases. Under current policy, capital gains taxes are calculated by subtracting the original price of an asset from the price at which it is sold and taxing the difference usually at 15 or 20 percent.
Fornwalt in his report used an example to illustrate the problem. If an investor spent $5,000 in the stock market 18 years ago and if the stocks were sold at $8,000 today, then the investor would be taxed on the $3,000 gain, he explained. But if the original price was adjusted for inflation, it would be about $7,100 as of today and the capital gain would be only $900, not $3,000, he said.
“Congress should consider indexing capital gains tax basis to ensure investors are taxed on their actual gain, not inflation,” Fornwalt stated.