As expected, Congress’ summer break didn’t mean a letup in the never-ending debate about capital gains indexing — whether or not President Trump should (or even can) allow taxpayers to remove inflation when calculating their capital gains taxes. Notably, Trump appeared to support the idea, close the door on it, and open it back up again, all in the course of a couple of weeks. A recent action by the IRS may give Trump just the assurance he needs, however.
One honest concern conservatives, and apparently the president himself, have about capital gains indexing is the legal authority of Treasury to do this. This is a healthy question. Conservative legal scholars have wanted to strike down the excessive “Chevron deference” courts have given regulators who too often act like legislators. The Obama administration was characterized by one executive overreach after another, especially on Obamacare and the environment. Bad memories persist of post-Sept. 11 security power grabs in the George W. Bush years. It is no surprise there is a so-called “Article I Movement” (named after the congressional powers section of the Constitution) among House and Senate movement conservatives.
Thankfully, those very serious and valid issues simply do not apply to the capital gains indexing issue.
On the larger legal theory front, longtime conservative stalwart and attorney Peter Ferrara this year produced a brief showing that the executive branch has the authority to define “cost” in a reasonable manner (and cost as adjusted for inflation is the economic definition of reasonable). This itself is the latest iteration of a legal memo originally written in 1992 (and updated in 2012) by Chuck Cooper, a prominent Beltway lawyer and former Assistant Attorney General under President Ronald Reagan.
Back in 1992, the Justice Department (led then and now by Attorney General Bill Barr) did not agree with Cooper (but neither did it disagree). White House counsel at the time, C. Boyden Gray, wanted to recommend cap gains indexing on policy grounds but wasn’t comfortable doing so on legal grounds (very notably, Gray said this month that he believes subsequent case law now means the executive branch has the power to index, in agreement with Ferrara). In any event, there are valid questions from a conservative perspective, though it seems pretty clear from Ferrara’s work and Gray’s opinion that the preponderance of the argument is now on the side in favor of executive authority.
I would submit that this debate has gotten a bit overblown. Most often, the question is posed as to whether the Treasury Department (the arm of the executive in charge of the IRS, and therefore the policymaker) has the authority to change the statutory definition of cost without an act of Congress. That, in essence, is what the debate described above is all about.
But is that really how this would work? As a non-attorney, but an IRS Enrolled Agent and tax practitioner for 15 years, I would suggest the legal authority objections are more modest in practice than in theory.
Those of us working to make capital gains indexing a reality are not asking the Treasury Department to change statute, or even change the mandatory definition of a statute. What we’re asking for is a most mundane and regular activity of the IRS — the creation of an optional “safe harbor” taxpayers may use, or not.
The IRS creates “safe harbor” definitions for taxpayers to rely upon all the time. It’s a part of sound tax administration. These are not regulations, they are done through sub-regulatory revenue rulings and revenue procedures, or even just notice and guidance. In fact, the IRS just did a very similar safe harbor to capital gains indexing a few weeks ago.
On June 24, Trump issued executive order 13877 directing the Treasury Department to expand the definition of “preventive care” for purposes of insurance plans tied to health savings accounts. The IRS subsequently issued IRS Notice 2019-45, which provides safe harbor definitions of preventive care for purposes of HSA-qualified plans. Notably, the new IRS notice builds upon, and does not replace, prior definitions of preventive care.
Let’s step back. Just this year, we see Trump himself issuing an executive order to the Treasury Department. This executive order directs the department to expand the definition of a term in statute. The Treasury Department does so, not through formal rule-making, but through the least formal of means, an IRS Notice. This definition is in the form of a “safe harbor,” meaning taxpayers may rely upon the definition, but they are not required to. This interpretation of statute builds upon existing definitions of the term, which remain in force. As executive actions go, this is light and justified.
What, exactly, is the difference between that and what the many supporters of capital gains indexing are asking for? There is none. The administration has ample legal authority, and they have a recently trodden path forward at the IRS. The authority question is, with all due respect, overblown concern trolling.
Ryan Ellis (@RyanLEllis) is president of the Center for a Free Economy.
