Indexing Capital Gains to Inflation by Executive Order is Still Illegal and Still a Bad Idea
The Usual Suspects Have Been Trying Since 1992
On February 19, the usual right-wing organizations that are always pushing for more tax cuts no matter what the circumstances sent a letter to Trump telling him to adjust capital gains for inflation by executive fiat. This is a campaign that they have waged since 1992 without success. The problem is that the president simply does not have the power, a fact admitted by Treasury Secretary Steve Mnuchin in Trump’s first term, who said Congress would have to act first. This is something that could have easily been done when the so-called “one, big, beautiful bill” was enacted last year. However, given Trump’s propensity to take actions without legal authority, such as toppling foreign governments at will, and the Supreme Court’s frequent willingness to rubber stamp his actions, the possibility that he might do something on capital gains indexing cannot be ruled out. For this reason, I have compiled a bibliography of research on the issue of indexing capital gains. The legal commentary is overwhelmingly negative on the president’s authority to do so without congressional action. The economic literature says that indexing capital gains would be extremely complex.
In chronological order
Joint Committee on Taxation, General Explanation of the Revenue Act of 1978, JCS-7-79 (March 12, 1979), p. 252.
“In addition, the Congress believed that an increased capital gains deduction would tend to offset the effect of inflation by reducing the amount of gain which is subject to tax. However, since the deduction is constant, unlike the adjustments generally provided for in various indexation proposals, it is much simpler and should not tend to exacerbate inflation.”
Commentary: It has long been the view among tax policymakers that a tax preference for capital gains is partially justified by the effect of inflation in creating illusory gains. Having a preferential rate plus indexing in effect confers an unjustified double benefit on capital gains.
Congressional Budget Office, Indexing Capital Gains (August 1990).
New York State Bar Association, Memorandum in Opposition to Proposal to Index Capital Gains for Inflation by Regulation (February 13, 1992).
“We believe that adoption of inflation indexation by regulation is a terrible idea. Whether or not inflation indexation is desirable, it raises complex policy, technical and revenue issues that are much too important to be decided unilaterally by a single branch of the government. Further, we believe such a regulation would be an invalid usurpation of the exclusive power of Congress to legislate a sweeping change in a basic income tax principle that has remained unaltered since the earliest days of the federal income tax.”
Department of Justice, Office of Legal Counsel, Legal Authority of the Department of the Treasury to Issue Regulations Indexing Capital Gains for Inflation (September 1992).
“The Department of the Treasury does not have legal authority to index capital gains for inflation by means of regulation.”.
Lawrence Zelenak, “Does Treasury Have Authority To Index Basis for Inflation?” Tax Notes (May 11, 1992), pp. 841-45.
“Abstract: In this article he examines the claim, which has been publicized in recent months, that the Treasury Department could unilaterally index the capital gains tax for inflation by new regulation interpreting code section 1012. He concludes, in light of more than seven decades of administrative, judicial and legislative history, that such unilateral action would be invalid.”
Note: Zelenak is professor of law at Duke University.
Charles J. Cooper, Michael A. Carvin, and Vincent J. Colatriano, “The Legal Authority of the Department of the Treasury To Promulgate a Regulation Providing for Indexation of Capital Gains,” Virginia Tax Review, vol. 12, no. 4 (Spring 1993), pp. 633-34.
“For the reasons discussed at length in this Article, we believe that the Treasury has administrative discretion to reinterpret ‘cost’ to take account of the economic reality that a ‘gain’ attributable solely to inflation adds nothing to the taxpayer’s real wealth or purchasing power. The term ‘cost’ is subject to more than one reasonable interpretation and is readily amenable to a construction that takes account of inflation.”
Note: This article is adapted from a 1992 study commissioned by the National Taxpayers Union Foundation and the National Chamber Foundation, both of which strongly supported indexation of capital gains by executive fiat.
Reed Shuldiner, “Indexing the Tax Code,” Tax Law Review, vol. 48, no. 3 (Spring 1993), pp. 537-659.
Discusses technical problems with indexing capital gains—treatment of capital losses, appropriate index, holding period etc. Shuldiner is professor of law at the University of Pennsylvania.
William P. Barr, “Attorney General’s Remarks, Benjamin N. Cardozo School of Law, November 15, 1992,” Cardozo Law Review, vol. 15, nos. 1&2 (October 1993), pp. 35-36. Footnotes converted to links.
“Another more recent example is the question of indexing capital gains. There was a great deal of pressure—not from the administration but from writers and from Republicans on the Hill—to conclude that the President could index capital gains. There again, I paid close attention to the question that was being asked. Robert Novak wrote that the problem was that I was not sent sufficient signals as to what answer was wanted. While I agree with Novak on many things, here he was mistaken. On the contrary, I was clearly told what the question was, which was, is indexing lawful. Also, I understood the policy preferences of the administration. The question was: Can we, simply through administrative action, index capital gains. And not only did I not think we could, I did not think that a reasonable argument could be made to support that position.
“The reason that I had no hesitation in rejecting the legal bases for a line-item veto and capital gains indexing is rooted in my view that the President has a responsibility to his office to advance responsible positions of law. I believe that President Bush fully shares this position. Ultimately, if you attempt to push too hard—even as a matter of litigation risks—and take legal positions that clearly will not be sustained, or that are not responsible and reasonable legal positions, you will lose ground. That certainly was the consequence of the Steel Seizure Case. And so in this administration, that is why the question has been, what is the right legal answer—not whether we can provide a veneer of justification for a given action. Our view has been that if we go into court with untenable positions and lose, we ultimately weaken the office of the President.”
Note: Barr was Attorney General in 1992 when this issue first arose.
Senate Finance Committee, Indexation of Assets (February 1995).
Hearing
Shimon B. Edelstein, “Indexing Capital Gains for Inflation: The Impact of Recent Inflation Trends, Mutual Fund Financial Intermediation, and Information Technology,” Brooklyn Law Review, vol. 65, no. 3 (1999), pp.824-25.
“In the past few years, because of low inflation, the equity arguments against inflation indexing have been strengthened, since investors can now more easily compensate for inflation via deferral. The uneven distribution of inflation over the economy, caused by technological advances, also strengthens the argument that inflation indexing is not an entirely accurate remedy. Likewise, the recent controversy over the CPI makes the argument that inflation indexing is not accurate more compelling. Thus, considering its lack of accuracy, inflation indexing may, in fact, be inappropriate.
“In addition, the mutual fund revolution has undermined the lock in argument, that the unindexed code creates an inefficient allocation of the nation’s economic resources. As explained earlier, mutual funds are largely immune from lock in, hence the astonishing growth of funds would likely minimize any putative effect that lock in may have on the economy. In addition, mutual funds weaken any indexing argument based on utility lock in. 33 As the merit of these arguments has increased substantially over the past few years, it follows that the current economic trends militate against inflation indexing, both from an equity and an efficiency point of view.”
Charles J. Cooper and Vincent Colatriano, “The Regulatory Authority of the Treasury Department to Index Capital Gains for Inflation: A Sequel,” Harvard Journal of Law & Public Policy, vol. 35, no. 2 (Spring 2012), pp. 487-524.
“This Article is a sequel to our VTR article; its purpose is to identify any relevant legislative and jurisprudential developments that have taken place over the last twenty years and to assess their impact, if any, on the conclusions we reached in 1992. As discussed in Part II below, although the question remains a close one, it is not as close as it was in 1992. Post‐1992 developments have substantially strengthened our original 1992 conclusions that the Code’s capital gains provisions do not foreclose the Treasury from providing by regulation for the indexation of capital gains and that any such regulation would be entitled to deference under Chevron and analogous legal principles as a valid exercise of the Treasury’s interpretative discretion. Moreover, although over the past twenty years Congress failed to enact bills providing for indexation and successfully enacted other types of capital gains ‘preferences,’ these legislative developments are no different in kind from similar pre‐1992 developments and thus do not repeal or otherwise eliminate Treasury’s discretion under the Code to provide for indexation by regulation.”
Bruce Bartlett, “Indexing Capital Gains by Fiat,” Tax Notes (May 15, 2012).
History of the effort to index capital gains administratively.
Leonard E. Burman, “Should Treasury Index Capital Gains?” Tax Policy Center (May 10, 2018)
Indexing could be very complex.
Capital gains are affected less by inflation than other kinds of capital income.
Indexing capital gains without indexing interest expense and depreciation creates opportunities for tax sheltering.
Indexing capital gains would add to our burgeoning debt unless accompanied by offsetting tax increases or spending cuts.
Indexing capital gains alone would be an extremely regressive tax cut.
Burman was deputy assistant secretary of the Treasury for Tax Analysis, 1998-2000.
Jane G. Gravelle, “Indexing Capital Gains for Inflation,” Congressional Research Service Report R45229 (July 24, 2018).
“Depending on the design, estimates suggest a range of $10 billion to $30 billion per year in revenue costs. Economic growth effects would be relatively small, with even the largest revenue estimate pointing to a decrease in the cost of capital of 6 to 7 basis points (lower required returns of 0.06% to 0.07%). Evidence also suggests that the savings effect would be small and likely to be offset by crowding out of private investment by government borrowing if debt-financed. The change would favor high-income individuals with about 60% benefiting the top 0.1% and around 90% benefiting the top 1% in the income distribution.
“Favorable treatment for capital gains on stocks has been advanced due to the double taxation of dividends, but the 2017 tax changes have made that justification less persuasive. Capital gains indexing would reduce the distortion between debt and equity but increase the favoritism of retaining earnings over paying dividends. It would reduce the lock-in effect that causes Indexing Capital Gains Taxes for Inflation Congressional Research Service individuals to retain current assets because of the tax, although not as much as an exclusion equivalent. Administrative and compliance costs would increase because each vintage of assets would require a different exclusion, but improved computing facilities make that issue less burdensome.”
Letter from Senator Angus King (I-Maine) to Treasury Secretary Steve Mnuchin (August 1, 2018).
“The legal case supporting unilateral action by the Department to execute this change to the tax code is weak. A similar action was considered and ultimately rejected in 1992 by President George H.W. Bush’s administration. The Department of Justice concluded that the Treasury does not have the regulatory authority to index capital gains for inflation – not then, and not now.
“I urge you to adhere and respect the 1992 opinion. Indexing capital gains to inflations would blow an even an even larger hole through the deficit, and for no need or benefit to the vast majority of the American people. I look forward to hearing from you on this issue.”
Kyle Pomerleau, “Economic and Budgetary Impact of Indexing Capital Gains to Inflation,” Tax Foundation (September 4, 2018).
According to the Tax Foundation General Equilibrium Model, indexing capital gains to inflation would increase the long-run size of the economy by 0.11 percent. Wages would be 0.08 percent higher, the capital stock would be 0.26 percent larger, and there would be an additional 21,800 full-time equivalent jobs.
Indexing capital gains to inflation would reduce federal revenue by $178 billion over the next decade on a conventional basis. Additional economic growth will offset some of that cost, leading to a net dynamic revenue loss of $148 billion over the next decade.
Daniel Hemel and David Kamin, “The False Promise of Presidential Indexation.” Yale Journal on Regulation, vol. 36, no. 2 (Summer 2019), pp. 693-733.
“The Trump administration faces mounting pressure from conservative thinkers and activists—including calls from its own National Economic Council director—to promulgate a Treasury regulation that indexes capital gains for inflation. Proponents of such a move—which is sometimes called “presidential indexation”—make three principal arguments in favor of the proposal: (1) that inflation indexing would be an economic boon; (2) that the President and his Treasury Department have legal authority to implement inflation indexing without further congressional authorization; and (3) that in any event, it is unlikely that anyone would have standing to challenge such an action in court. This article evaluates the proponents’ three arguments and concludes that all are faulty. First, whatever the merits of comprehensive legislation that adjusts the taxation of capital gains and various other elements of the Internal Revenue Code for inflation, rifle-shot regulatory action that targets only the capital gains tax would be costly and regressive, and would open a number of large loopholes that allow for rampant tax arbitrage. Second, the legal authority for presidential indexation simply does not exist. The Justice Department under the first President Bush reached the conclusion in 1992 that the Executive Branch cannot implement inflation indexing unilaterally, and doctrinal developments in the last quarter century have—if anything—strengthened that conclusion. Third, a number of potential plaintiffs—including states, charitable organizations, and brokers subject to statutory basis reporting requirements—would likely have standing to challenge presidential indexation in federal court. In sum, the promise of presidential indexation turns out to be hollow, and calls for unilateral action should be spurned.”
Note: Hemel and Kamin are professors of law at New York University.
Letter from Republican Senators to Treasury Secretary Steve Mnuchin, Americans for Tax Reform (July 29, 2019).
Supports tax indexing by executive order.
Letter from conservative tax organizations to President Trump, Americans for Tax Reform (February 19, 2026).
Supports tax indexing by executive order.