Most won’t gain from Trump’s latest tax proposal

Last week the Trump administration floated the idea of a new tax break on income from capital gains, requesting a review by the U.S. Treasury of the idea. The tax break would in effect protect investors from having to pay capital gains taxes that result from inflation.

The response from the ‘lamestream’ media — of which I am a proud member — was swift and condemnatory. “Unilateral Tax Cut for the Rich” said the New York Times headline. “$100 billion tax cut for the rich” wrote Vox, and “Huge Windfall For The Richest 1%” said the Washington Post. The Times followed up with an op-ed questioning its legality, “Trump’s Crony Capitalists Plot a New Heist.”

As a general rule, I enjoy new income tax proposals. They’re fun and instructive. That doesn’t mean I think we should frequently enact new tax laws willy nilly. I just mean that, because taxes are the means by which government leaders most clearly enact their philosophy of what makes for a good society, tax proposals are a great way of figuring out what our leaders care about, and also what we care about.

In reviewing tax proposals, generally we should ask the following questions: Is it practical and enforceable? Does it reward or discourage economic behavior that we want? Is it fiscally prudent? Finally, is it fair? I’m interested in all these questions.

So how would the tax break work?

Capital gains occur when you buy an investment — a business, a stock, some real estate — and then sell that for a gain. If you made a profit of $100,000 on buying and selling your investment, the money you make gets taxed, generally at 20 percent, or $20,000. The proposal would allow you to avoid taxes on the portion of your gains attributable to inflation. But if inflation accounted for half of that $100,000 gain then under this new proposal you’d only owe taxes on half the gain, or $10,000. So yes, this represents a potentially big tax cut.

The tax cuts would be especially beneficial under two scenarios. First, if inflation is high, and second, if the investment is held over a long period of time, such that inflation accounts for a significant portion of the gains. One theory floated by proponents of the tax cut is that wealthy people holding highly appreciated stock, for example, would be motivated to sell if they faced a lower tax bill. Rep. Kevin Brady, chairman of the House Ways and Means Committee is reported to favor this reform, because “I think we ought to look at not penalizing Americans for inflation.”

Beyond those ideas, what’s the main case for this tax break? If you ascribe to the idea that investment and risk-taking is the engine of the economy, then

MICHAEL TAYLOR