July 31, 2018
We may have an idea what was the (leaked) reason for today’s selloff in Treasurys, which pushed the 10Y yield just shy of 3.00%.
According to the NYT, the Trump administration is considering a $100 billion unilateral tax cut meant to mainly help the wealthy, and is hopes to bypass Congress in implementing it “a legally tenuous maneuver that would cut capital gains taxation and fulfill a long-held ambition of many investors and conservatives.”
However, despite the NYT’s alarmist take, Trump’s proposal actually does make some sense: what it calls for is to inflation-adjust one’s long-term cost basis when calculating capital gains tax. Considering that various welfare programs like Social Security are already indexed for Cost of Living Adjustments, the idea is probably not that outlandish, especially if inflation were to suddenly explode higher.
Here’s how it would work.
Currently, capital gains taxes are determined by subtracting the original price of an asset from the price at which it was sold and taxing the difference, usually at 20 percent. If a high earner spent $100,000 on stock in 1980, then sold it for $1 million today, she would owe taxes on $900,000. But if her original purchase price was adjusted for inflation, it would be about $300,000, reducing her taxable “gain” to $700,000. That would save the investor $40,000.
Treasury Secretary Steven Mnuchin hinted at the idea during last weekend’s G-20 meeting in Buenos Aires, when he told reporters that his department was studying whether it could use its regulatory powers to allow Americans to account for inflation in determining capital gains tax liabilities. The Treasury Department could change the definition of “cost” for calculating capital gains, allowing taxpayers to adjust the initial value of an asset, such as a home or a share of stock, for inflation when it sells.