Conservatives have argued for decades that the capital-gains tax should be indexed to inflation. When George H. W. Bush was president, some conservatives argued that he could interpret the tax laws in a way that let him adopt this policy without a vote of Congress. Now that Larry Kudlow is director of the National Economic Council, this effort could be revived.
At Bloomberg View today, I take up two questions: Should capital-gains taxes be indexed to inflation? And should the executive branch implement this policy on its own? My answers are yes and no, respectively.
Here I want to elaborate on one point. I suggest in the Bloomberg article that having the president go it alone on capital gains would conflict with conservatives’ growing distrust of executive-branch legislating. But the problem is a little more specific than that.
Conservatives have been moving away from the idea, known as “Chevron deference,” that the courts should in most circumstances accept the executive branch’s reading of the law. In his last years, Justice Antonin Scalia seemed to turn against the idea, and the newest justice, Neil Gorsuch, is a critic. Senator Mike Lee’s Separation of Powers Act attempts to do away with Chevron deference altogether.
The view that the president can index the capital-gains tax to inflation is, however, heavily based on Chevron deference. See, for example, this law-review article, which is the most detailed recent case for that view. The argument runs as follows: The relevant statute contains ambiguous language about the “cost” of the initial purchase of an asset; that language could be read to mean the inflation-adjusted cost; the courts would be obliged to respect an executive-branch determination to read it that way. Eliminate that deference, and instead the question for the courts would be: Is inflation-adjusted cost the best possible reading of “cost”? It’s a much higher hurdle for the executive to overcome.