Trump 'seriously' considering a capital gains tax cut: What that means for you

Trump could try to bypass Congress and lower the tax by indexing gains to inflation

President Trump opened the door this week to a capital gains tax cut, saying he's "seriously" considering it as a way to help the U.S. economy recover from the coronavirus-induced recession.

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“We’re looking at also considering a capital gains tax cut, which would create a lot more jobs,” Trump said Monday during a White House press briefing. “So we're looking very seriously at a capital gains tax cut and also at an income tax cut for middle-income families."

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Trump cannot use executive authority to slash the 20% long-term capital gains rate without Congress, but he could try to bypass Congress and lower the tax by indexing gains to inflation.

A capital gain is the profit from the sale of stock or real estate; indexing capital gains would lower tax bills for investors who are selling by adjusting the original purchase price of the item in line with inflation, essentially making a portion of gains exempt from taxation.

For instance, if an individual purchased an asset for $100 in 2000 and sold that item 18 years later for $200, the nominal capital gain would be $100, according to the Tax Foundation. But inflation over that same time period would have increased the price level by 49%. Under an indexing proposal, the original selling price would increase to $149 — meaning the individual would only pay a tax on $51, instead of the full $100.

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But indexing capital gains taxes would do very little to actually spur economic growth, according to the Tax Foundation. In fact, only the top 1% of taxpayers would see their after-tax income increase -- an increase of 0.83%.

A separate study by the Penn Wharton Budget Model found that the top 1% of households would receive 86% of the benefit. The policy could reduce tax revenue by $102 billion over the next decade.

In 2019, Trump considered indexing capital gains to inflation, but ultimately backed away from the proposal, telling reporters that it's "perceived as somewhat elitist" and "better support for upper-income groups."

Facing a deadlocked Congress, Trump has recently acted unilaterally on additional virus relief, signing four executive actions on Saturday that include an order to postpone the collection of payroll taxes through the end of the year. The maximum benefit that Americans could see during that four-month period is about $2,149.

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Trump has pledged to pursue a permanent cut to the payroll taxes, but without legislation, those payments will still be required by the delayed due date.

However, some of his proposals would likely face legal challenges. The Constitution gives Congress the power of federal spending, and critics say Trump does not have the legal authority to issue executive orders allocating how much money should be spent on the pandemic.

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