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Trump Rules Out Indexing Capital-Gains Taxes to Inflation — 3rd Update

By Andrew Restuccia and Kate Davidson 

President Trump told his advisers on Wednesday that he doesn't plan to try to bypass Congress and lower capital-gains taxes by indexing gains to inflation, according to three people familiar with the matter.

Mr. Trump delivered the message during an afternoon White House meeting on the capital-gains proposal. The idea has been under discussion in the White House for months and has divided Mr. Trump's aides, with some warning privately that it could cost him politically ahead of the 2020 election, the people said.

"President Trump was thoroughly briefed on the complex economic, legal and regulatory issues, and concluded that at this time he does not feel enough of the benefits will go to the middle class," White House spokesman Judd Deere said in an email when asked for comment.

One of the people familiar with the meeting said Mr. Trump didn't completely rule out eventually trying to index capital gains to inflation, but signaled he had no plans to do it in the short term.

Conservative groups and some Republican lawmakers had urged Mr. Trump in recent weeks to move forward with the plan.

At the same time, Democrats had already begun casting the move as a giveaway to the nation's wealthy.

Wednesday's meeting included Treasury Secretary Steven Mnuchin, Attorney General William Barr, Council of Economic Advisers acting Chairman Tomas Philipson, Office of Management and Budget acting Director Russ Vought, National Economic Council Director Lawrence Kudlow, White House Legislative Affairs Director Eric Ueland and White House trade adviser Peter Navarro, officials said.

The discussion came after Mr. Trump sent mixed signals about whether he supports such a move, which would likely face legal challenges.

After teasing the possibility of indexing capital-gains taxes to inflation last month, Mr. Trump appeared to reverse course the next day, saying it would be seen as "somewhat elitist" because it benefits the wealthy.

But he brought up the idea again a week later, touting a recent op-ed written by Sen. Ted Cruz (R., Texas) and Americans for Tax Reform President Grover Norquist urging him to index capital-gains taxes to inflation. Messrs. Cruz and Norquist argued in the op-ed that such a move would unleash "untapped potential across our economy."

"An idea liked by many?" Mr. Trump tweeted, linking to the article.

Under current law, investors pay taxes on their nominal capital gains, meaning that someone who in 1990 bought $100,000 of stock that is now worth $1 million would pay taxes on $900,000 in capital gains, even though some of that gain is due to inflation.

Allowing taxpayers to adjust their cost basis for inflation might encourage people to sell long-held assets. But it would also reduce taxes by about $100 billion over a decade, according to the Penn-Wharton Budget Model, with most of the benefits going to high-income households.

Capital gains face a top federal tax rate of 23.8%, which is lower than the top rates on wages or profits from closely held businesses. That preferential rate exists, in part, as a rough way of countering the effects of inflation.

The National Economic Council, the Council of Economic Advisers, the Office of Management and Budget and the Treasury Department had all been reviewing the concept, administration officials said.

Some of Mr. Trump's aides -- including Mr. Kudlow -- have long supported the idea. But Treasury Secretary Steven Mnuchin had expressed reservations, aides said.

Supporters of the effort said the discussion of indexing capital gains to inflation wasn't a direct response to concerns about a potential economic downturn, noting that many in the administration have sought to do it for years.

To make the change unilaterally, the administration would likely have had to reverse a 1992 opinion by the Justice Department's Office of Legal Counsel that concluded that the Treasury lacked the authority to define the word "cost" to include inflationary gains. The attorney general at the time, William Barr, is again the attorney general.

Before Wednesday's meeting, two administration officials said it is unclear whether the Justice Department would alter the opinion, but the officials said the department had been involved in the discussions about the proposal. A Justice Department spokeswoman declined to comment.

The meeting also touched on a broader set of tax cuts the administration hopes to move through Congress commonly referred to as "Tax Cuts 2.0." Exactly what would be included in such a package couldn't be determined, though Republicans have at varying times said it would extend pieces of the 2017 tax law that are scheduled to expire, and hinted at a vague new middle-class tax cut that the administration hasn't yet detailed.

Mr. Trump and his advisers have said they hope to announce a second round of tax cuts in the coming months, but winning congressional approval would likely face major hurdles, given that Democrats now control the House.

Richard Rubin

contributed to this article.

Write to Andrew Restuccia at Andrew.Restuccia@wsj.com and Kate Davidson at kate.davidson@wsj.com

 

(END) Dow Jones Newswires

September 11, 2019 19:44 ET (23:44 GMT)

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