WSJ Has a Great Idea That Will Drive Some People Nuts
The idea is to index capital gains to inflation, and their belief is that it can be done through ….. an Executive Order (link to yesterday’s editorial requires subscription):
The Pence-Cantor bill would protect against this by allowing any taxpayer holding an asset for more than three years to have a gain or loss determined by a cost basis adjusted for inflation. The proposal would immediately raise the after-tax return on capital investment, thus providing an incentive for more of it.
The Bush Administration should consider getting behind the bill, but it might also be able to achieve the same result without legislation — that is, via executive order. The tax code says only that taxes must be paid on gains as measured by the increase from the “basis” a taxpayer has in the property. The code then defines that basis as “the cost of such property,” but without declaring whether that cost is real (after inflation) or nominal. If Treasury had the authority to define “cost” in one manner in 1913, it surely has the authority to redefine “cost” today.
President George H. W. Bush flinched from making this change in 1992 on the advice of government lawyers who argued that the definition of “cost” had been around so long that only Congress could now change it. But that legal interpretation is open to argument, all the more so given that inflation is once again making a comeback, albeit far more modestly than in the 1970s. Nonetheless, an inflation rate of 3% over a decade devalues the dollar value of a financial asset by about 35%. Academics have also argued that a President could redefine cost to allow, for instance, the indexing of depreciation schedules — another bow to fairness and a boost for investment.
I’d like to see him do it just to see the apoplectic reactions to it.
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