Why you should care

Because conservatives have another round of tax cuts up their sleeves.

Grover Norquist, president of Americans for Tax Reform, is in the thick of politics more than most. Here’s what he has to say about President Trump’s new tax plan.

President Donald Trump and House Ways and Means Chairman Kevin Brady, R-Texas, recently engaged in public banter confirming that there will be a Tax Cut Phase II. There are three competing ideas for what will constitute the next big cut.

First, Republicans will force a vote in the House and perhaps the Senate as close to April 15 as possible — the official return cutoff this year is actually April 17 — on legislation to make permanent individual tax cuts that would otherwise disappear in eight years.

These include lower tax rates for all taxpayers. The top rate fell from 39.6 to 37 percent, and the bottom rate fell from 10 percent to zero, the 15 percent rate dropped to 12 percent, the 25 percent rate to 22, the 28 percent rate to 24 and the 33 percent rate to 32. The other tax cuts that snap back in 2026 are the doubled standard deduction of $12,000 ($24,000 for families), the per child tax credit of $2,000, the lower tax rate for pass-through entities and the higher exemption for the death tax and the alternative minimum tax.

Ending the taxation of inflation for individual cap gains would in effect cut the rate from 23.8 to about 12 percent.

This is largely a messaging effort to woo voters. Now that more Americans have seen what the tax reform legislation actually did to increase their take-home pay — the Treasury Department estimated that 90 percent of Americans would see lower tax bills and higher take-home pay — it is the right time, Republicans figure, to remind voters just who supported this pay hike (Republicans) and who voted no (Democrats).

Party discipline and optimism about Democrat voter turnout in 2018 will ensure that all Democrats vote once again against lower tax bills. This allows Republicans to share this message: “Return GOP control of the Senate and House, and we will make your tax cut permanent using the budget reconciliation rule, which only requires 50 Senate votes.”

Another aspect of Tax Cut Phase II is to begin sketching larger changes in a future bill: Cut the corporate rate to 15 percent (down from today’s 21 percent) as Trump originally urged, or bring the top rate down from 37 to 28 percent — the bipartisan consensus top rate in 1986.

So what’s likely to actually happen this spring? The elimination of the taxation of inflation when taxing capital gains. Present IRS regulations set the cost of assets (land, buildings, stock, etc.) at the historical purchase price. You pay capital gains taxes on the real gain over time plus inflation.

The Treasury Department has the ability to make a definitional change from historic cost to historic cost plus inflation. In Verizon v. FCC (2002), the Supreme Court ruled that cost had no set definition and could be interpreted in different ways. Chuck Cooper, the Republican lawyer who was in the running to be solicitor general under Trump, has written two legal briefs making the case that a regular change in the definition of “cost” has become increasingly defensible since it was originally proposed in 1993.

One notes that Reagan’s 1981 tax cut reduced individual income tax rates by 25 percent and indexed tax brackets for inflation. No longer were Americans pushed into ever higher personal income tax brackets without any real income gain.

Legislation to end the taxation of inflation in capital gains was introduced in 2007 by a young congressman: Mike Pence. Co-sponsors included now Speaker Paul Ryan, R-Wis., and Brady. The drive to end the taxation of inflation within capital gains won a key supporter when Larry Kudlow joined the White House as director of the National Economic Council. Kudlow endorsed making this change through regulatory clarification in a column on Aug. 11, 2017, arguing it would “spark a wave of prosperity.”

Some business leaders suggested back in 2006 that the capital gains tax for corporate capital gains be lowered from 35 percent (there was and still is no capital gains differential in corporate taxation) to 15 percent, arguing that it would lead to $7 trillion in land, buildings and stock that were not previously sold because the buildup of inflation within those gains made a sale at 35 percent less attractive.

We have just cut the capital gains tax rate from 35 to 21 percent. The Tax Foundation estimates that 45 percent of the capital gains taxed at the individual rate is actually inflation. Ending the taxation of inflation for individual capital gains would in effect cut the rate from 23.8 to about 12 percent. But companies live longer than people and have more inflation in the value of their land, building and stock holdings. Ending the taxation of inflation on corporate capital gains could drop the effective rate to below 10 percent and set off a massive reallocation of resources to their highest and best use. And capital gains tax revenue would shoot up between today and, say, Nov. 6, 2018.

Republicans are seeing this simple regulatory change as a twofer. First, it would take the sting out of the limitation of tax benefits that disappointed two powerful and numerous lobbies — homebuilders and real estate agents. Second, it would be a shot in the arm for an already thriving economy that could overcome the headwinds of a threatened trade war — not to mention next week’s tweets.

OZYOpinion

Interviews, op-eds, and analysis to help you make sense of the news of the day and the news of the future.