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"Capital gain indexing," said Trump's latest tax cut plan



On Friday, President Donald Trump pointed out on his preferred public platform that his government has been in power for at least a year: harnessing the power of the president to unilaterally cut taxes on investors.

On Twitter, Trump joined with a commentary by Senator Ted Cruz and the veteran anti-tax crusader Grover Norquist, who called on the government to measure capital gains against inflation. It is currently stated that a purchase of one share in 1998 for $ 30 and a sale for $ 40 this year would result in a long-term capital gain of $ 1

0 for federal tax purposes. But adjusted for inflation, $ 30 in 1998 is now about $ 46.79. So they would pay taxes on an investment that has lost money, adjusted for inflation.

This is the basis of the case in favor of the change: Taxation of inflation is proponents of change, arguing unfair and harming the economy by discouraging investment. The argument against indexation on inflation is much simpler: this is a change that would overwhelmingly benefit the wealthiest Americans, who own a majority of equities, real estate, and other capital, and whose sales would be affected. An estimate assumes that 86.1 percent of the benefit is earmarked for the richest 1 percent.

Some lawyers find it illegal to make this change through the executive, and congressional action would be required. An action in which the Democrats will probably never have control of the house.

What would the indexation of capital gains do for inflation?

Long-term capital gains (ie gains on real estate or investments that are sold after they have been held) for at least one year) are taxed at a lower tax rate than the wage income. The first $ 39,375 of a single person (and the first $ 78,750 of a pair) in capital gains is tax-free. Then, profits of up to $ 434,550 ($ 488,850 for couples) are taxed at 15 percent and profits in excess of 20 percent.

In contrast, the maximum wage wage rate is 37 percent, which means that the capital gain income taxed by wealthy individuals is only half of their wage income.

There are several reasons to index these gains for inflation, but one of them is the fact that long-term capital gains lose their value somewhat due to inflation. If you buy a stock for $ 40 and sell it for $ 60 five years later, part of the appreciation is because prices have risen across the economy.

As Daniel Hemel of UChicago and David Kamin of the NYU explained in a recent article on indexing The current structure "provides for a lower statutory rate of capital gains than some kind of 'rough justice', which is partly responsible for inflation . " This compromise – not indexation, but lower rates – is now particularly useful as inflation was low (around or below 2 percent) and stable over decades. These are normal costs that companies can budget for, and that can offset the tax code instead of presenting an unpredictable threat.

Some tax experts, including Hemel and Kamin and Len Burman of the Tax Policy Center, argue that this combination of lower tax rates for administrative reasons is preferable to indexing without indexing higher rates plus indexing (which is considered by some tax reformers). For example, what if the capital gain comes from a house you renovated? Not only would you need to keep track of when you bought the house and the land below, but also when you bought new sinks, when you hired contractors to install them, if you had people to add the insulation, and so on on and on. It quickly becomes a very difficult accounting problem.

For people whose primary goal is to lower capital taxation, such as Cruz, Norquist, and some Trump administration officials, the relevant alternative is no higher rate for capital gains while indexing, but indexing with rates unchanged. In general, this branch of the Republican Party is trying to minimize capital taxes because it fears that they are hindering investment, and eliminating taxes on inflationary gains is a step in that direction. In 2016, Cruz acted as president on a platform where corporate income tax was abolished and the capital gains rate lowered to 10 percent. It is fair to interpret indexing as a step closer to this goal.

The problem of talking about the executive, Kamin and Hemel, is twofold. For one thing, it could be illegal. In 1992, the first Bush administration's law firm concluded that under the Revenue Act of 1918 capital gains should be calculated on the basis of the initial "cost of such ownership," "cost" being the price actually paid, not the price adjusted for inflation. The conclusion was that the President and the Ministry of Finance are unable to adapt to inflation without Congress. Kamin and Hemel argue that this conclusion was only strengthened by later court rulings.

The second problem is that the executive measure does not force expenditure – such as interest paid or investment write-down – to be adjusted in line with inflation. Kamin and Hemel explain that this could be used by corporations to inflict large false losses in order to offset their taxes: Imagine a taxpayer buys a $ 100 asset fully funded by a loan becomes. Assuming that the real interest rate is zero, the inflation rate is 10% and the nominal interest rate for the loan is also 10%. One year later, assuming that the real value of the asset will not change, the value of the asset will be $ 110 due to inflation. If the basis for inflation is indexed, the taxpayer can sell the asset for $ 110 and not write a taxable profit. Assuming that the interest can be properly allocated to a trade or business, the taxpayer can claim an interest deduction of $ 10 without any return, even though the taxpayer is in the same position before tax as before

. This has even led to some libertarian-oriented economists being skeptical about capital taxes, as Kyle Pomerleau of the Tax Foundation expresses concern that making this change unilaterally regressive. The Penn Wharton Budget Model, a prestigious tax and fiscal model at the University of Pennsylvania, estimates that inflation indexation over a 10-year period would cost $ 102 billion and 86.1 percent would benefit the richest 1 percent the Americans would benefit. Almost two-thirds would go to the richest 0.1 percent. Capital ownership and capital gains are unbelievably concentrated, which means that cuts like these are overwhelmingly beneficial to the rich.

If you think that the capital taxes are just too high, this is a sensible step. But from any other perspective, it seems an effort to divert over $ 100 billion to the richest people in America.


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