And Yes, Treasury has the authority
Goal: To end the taxation of inflation in capital gains.
Reason: This would free up “sticky capital”—buildings, land, stocks—that are held by individuals or businesses rather than sold and put to higher and better use because much of the “capital gain” is inflation and the high capital gains tax discourages mobility of capital.
Benefits: The value of all property in America would increase. Trillions in land, buildings and share of stock would move to higher and better use. The capital gains tax on the increased number and amount of sales would dramatically increase federal revenues and reduce the deficit.
How: The Secretary of the Treasury or IRS Commissioner can use his regulatory authority to change the definition of the cost basis when calculating capital gains from today’s “historic cost” to “cost plus inflation” or “real cost.”
Who supports this effort?
-Larry Kudlow, Director of the National Economic Council [Link to Kudlow op-ed]
-Mick Mulvaney, Director of the Office of Management and Budget
-Speaker Paul Ryan
-Ways and Means Chairman Kevin Brady
-Ways and Means member Devin Nunes (sponsor of cap gains indexing bill, H.R. 6444)
-Senator Pat Toomey and Senator Ted Cruz
-Vice President Mike Pence (then-congressman introduced cap gains indexing legislation in 2006)
-Grover Norquist, Americans for Tax Reform
– Art Laffer
-National Federation of Independent Business
Does the Secretary of Treasury/IRS Commissioner have this authority? Yes. Two legal briefs by Chuck Cooper and others explain this. 1993 Chuck Cooper memo: [Link] 2012 Chuck Cooper/Vincent Colatriano memo: [Link]
So why hasn’t this been done? When Bush 41 looked to do this someone at Treasury wrote up a brief and claimed (falsely) that brief proves there is no authority. Bush 43 was directed to the same flawed memo. [Link]
The flawed memo claimed:
First false claim: Cost cannot be interpreted as cost plus inflation.
FACT: The Supreme Court ruled in Verizon Communications Inc. v. FCC that Cost is not an unambiguous term and that the FCC could by regulation shift from historic cost to historic cost plus inflation.
Second false claim: Four court decisions have ruled that Cost cannot be shifted to cost plus inflation.
FACT: Four cases were asked “does present interpretation of tax law allow one to use cost plus inflation when calculating capital gains.” The rulings were simply as to the present definition of cost, not whether that definition can be changed by regulation. All four cases are irrelevant to the question of Treasury’s authority (Ruben v. Commissioner, Crossland v. Commissioner, Vandenberge v. Commissioner, and Hawke v. Commissioner).
Third false claim: Congress voted in 1918 against indexing the cost basis for inflation, and this amendment can be found in the Congressional Record [Link].
FACT: If you read the actual Congressional Record the amendment would have set the Price for the sale of an asset at the price on January 1 of the year of sale regardless of when in the year the asset was sold. It did not address the cost or inflation. A detailed rebuttal of the “1992 Treasury memo” is here.
What to do: Write a regulation defining “cost” when calculating capital gains for businesses and individuals as the historic cost plus inflation accumulated between purchase/acquisition and sale. Decide which measure of inflation is most appropriate.
Issue the regulation immediately. As a definitional regulation this does not require public comment or any time lapse.