Indexing Capital Gains Which Americans Will Benefit

While it barely made the news cycle, a recent letter sent by 20 Republican Senators to the Secretary of the Treasury, Steven Mnuchin, should give middle class Americans reason to vote for "the other party" given the Trump Administration's preferential treatment of wealthy Americans in its taxation policies implemented in the Tax Cuts and Jobs Act.

Here is the letter:

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According to the letter, "...the United States economy has experienced historic levels of growth as a result of Congress and the current Administration's policies such as the Tax Cuts and Jobs Act…" and that implementation of the suggested changes to the calculation of capital gains tax liabilities would certainly help to "...perpetuate these successes by encouraging savings, investment and innovation so that everyday Americans can continue to enjoy better lives and livelihoods."

In fact, a 2019 report from the nonpartisan Congressional Research Service (CRS) showed that the Trump Administration's Tax Cuts and Jobs Act of 2017 had no positive effect on either economic growth and wages but did save Corporate America billions of dollars in taxes thanks to the new headline corporate tax rate of 21 percent.  

Let's start by looking at the impact of the tax revisions on economic growth.  Here is a figure showing the growth in real GDP from Q1 2013 to Q4 2018:

The actual growth rate for calendar 2018 was 2.9 percent, not significantly higher than the 2.7 percent growth rate that was predicted by the Congressional Budget Office in April 2018.  The high rate of growth in Q2 2018 was likely due to the demand-side stimulus of the tax cuts which were reflecting in withholding of spending during the first quarter of 2018 along with the delayed receipt of tax refunds.  Here is a quote from the CRS:

"On the whole, the growth effects tend to show a relatively small (if any) first-year effect on the economy. Although examining the growth rates cannot indicate the effects of the tax cut on GDP, it does tend to rule out very large effects in the near term."

Now, let's look at the impact of the tax revisions on wages.  Here is a figure showing the growth in both real wages and real GDP from Q1 2013 to Q4 2018:

As you can see, in the post Tax Cuts and Jobs Act timeframe, there is no indication of a surge in wage growth over 2018 when compared to historical real wage growth or relative to GDP growth.  Here is another quote from the CRS:

"The Department of Labor reports that average weekly wages of production and nonsupervisory workers were $742 in 2017 and $766 in 2018.36 Wages, assuming full-time work, increased by $1,248 annually. But this number must account for inflation and growth that would otherwise have occurred regardless of the tax change. The nominal growth rate in wages was 3.2%, but adjusting for the GDP price deflator, real wages increased by 1.2%. This growth is smaller than overall growth in labor compensation and indicates that ordinary workers had very little growth in wage rates."

Now that we can clearly see that the Republican Senators' assertion that the Tax Cuts and Jobs Act has resulted in historic levels of economic growth and an improvement in wages and salary is a complete fabrication, let's look at the assertion that indexing capital gains to inflation will help "….everyday Americans…to enjoy better lives and livelihoods".  Thankfully, a 2018 study by John Ricco at Penn Wharton looks at the impact of indexing capital gains to inflation on various income groups in America.  According to the study, such a policy would reduce individual tax revenues by $102 billion over the next decade.  When looking at adjusted gross income (AGI) groups, the study found that most of the benefit of such a change would accrue to the top earners in America as shown on this table:

In fact, the top 5 percent of earners would receive 95 percent of the tax reduction if capital gains were indexed and the top 0.1 percent would receive 63.1 percent of the tax reduction.  The bottom 60 percent of earners would only receive a measly 0.1 percent of the total tax reduction that would occur if capital gains were indexed to inflation.

You will notice that the solution proposed by this group of Senators is to use the president's executive authority as shown in this quote:

"Utilizing executive authority to define cost basis in a way that would remove the unfair inflation tax on savings and investment would be one such positive, pro-growth change the Administration could undertake."  (my bold)

In case you hadn't noticed, the first signatory on the letter is Senator Ted Cruz who had this to say about the use of executive authority during the Obama era:

"Of all the troubling aspects of the Obama presidency, none is more dangerous than the president’s persistent pattern of lawlessness, his willingness to disregard the written law and instead enforce his own policies via executive fiat. On Monday, Mr. Obama acted unilaterally to raise the minimum wage paid by federal contracts, the first of many executive actions the White House promised would be a theme of his State of the Union address Tuesday night.

The president’s taste for unilateral action to circumvent Congress should concern every citizen, regardless of party or ideology. The great 18th-century political philosopher Montesquieu observed: “There can be no liberty where the legislative and executive powers are united in the same person, or body of magistrates.” America’s Founding Fathers took this warning to heart, and we should too.

Rule of law doesn’t simply mean that society has laws; dictatorships are often characterized by an abundance of laws. Rather, rule of law means that we are a nation ruled by laws, not men. That no one—and especially not the president—is above the law. For that reason, the U.S. Constitution imposes on every president the express duty to “take Care that the Laws be faithfully executed.”

Yet rather than honor this duty, President Obama has openly defied it by repeatedly suspending, delaying and waiving portions of the laws he is charged to enforce…

President Obama has a different approach. As he said recently, describing his executive powers: “I’ve got a pen, and I’ve got a phone.” Under the Constitution, that is not the way federal law is supposed to work….

As Montesquieu knew, an imperial presidency threatens the liberty of every citizen. Because when a president can pick and choose which laws to follow and which to ignore, he is no longer a president."

But, I guess using executive authority is fine as long as it benefits your wealthy peers.

With "everyday Americans" experiencing pitiful after-inflation wage growth like this:

 …and finding that their share of tax remittences to Washington's total revenue has done this:

…it is a wonder that there isn't more rage in the streets of America when voters know that their elected representatives are proposing even greater tax cuts for their most wealthy constituents under the guise of making life better for their constituents that live hand-to-mouth existences in America's middle class.

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