On Thursday, Donald Trump voiced support for a change to the tax code that the administration is considering taking without needing to be voted upon by Congress.
President Donald Trump said Thursday he would consider linking capital gains taxes to inflation, repeating an idea previously floated by his administration that some see as tantamount to a tax cut for the rich.
The idea has been pushed by the White House’s top economic advisor, Larry Kudlow; Treasury Secretary Steven Mnuchin raised the idea earlier this summer. But it has also been considered in prior administrations, including that of George H. W. Bush, which ultimately dropped it.
It would be an estimated $100 billion tax cut that would benefit largely those who own assets such as stocks and real estate. Mnuchin told The New York Times in July that the Treasury was looking at whether it could use regulatory powers to allow for the change. Critics have said Congress would need to approve it.
As mentioned in the article, this tax cut would mainly benefit the already wealthy.
The way it would work is that the initial cost basis for an asset would be adjusted upward to account for inflation. When an asset is sold, the capital gain is calculated as the sale price less the cost basis (how much was paid for the asset). That capital gain is then subject to a tax. For long term capital gains, which means the asset was owned for at least a year and which is the type of capital gains that would be affected by this tax cut, the tax paid on the gain is either 0%, 15%, or 20%, depending on the income of the tax filer. The 0% rate applies to tax filers with less than $38,600 in income. The 15% rate applies tax filers with $38,601 to $425,800 in income. The 20% tax rate applies to tax filers with more than $425,800 in income. If the cost basis is adjusted upward, the amount of the capital gain is adjusted downward, which lessens the amount that is subject to the tax.
For a simple example, take a stock that was purchased in May of 1997 for $100. This is the cost basis for the investment. If sold in July of 2018 for $200, the capital gain would be $100. If the purchaser was in the top tax bracket for long term capital gains, that $100 would be subject to a 20% tax, and the tax filer would owe $20 in taxes.
Now, if the cost basis was adjusted for inflation, the cost basis would become $157.41 instead of $100. The capital gain subject to the long term capital gains tax would then be $42.59 instead of $100, and the tax filer in our example would owe $8.52 in taxes instead of $20.
To calculate inflation, the below inflation calculator was used:
Okay, now let’s take a real world example: Jeff Bezos.
Jeff Bezos is the owner of approximately 78.89 million shares of Amazon Stock, which is currently valued at $2012.71 per share.
The number-one shareholder in the company, directly holding approximately 78.89 million shares as of May 2018, is Amazon’s chief executive officer (CEO) and founder, Jeff Bezos.
NasdaqGS – NasdaqGS Real Time Price. 2,012.71+10.33 (+0.52%) At close: August 31 4:00PM EDT
Amazon went public in May of 1997, at $18 a share. Through stock splits, the initial price has been divided by 12 to $1.50 a share.
Even after three stock splits that cut the price of its IPO shares by 12.
Of the 78.89 million shares that Jeff Bezos owns, it is difficult to ascertain the cost basis. So, for our estimation, we will use the initial offering price, which is now $1.50/share. Jeff Bezos was the founder of the company, so presumably a large portion of his stock holdings were acquired at the time the company went public. If adjusted for inflation, that $1.50/share cost basis would be increased to $2.36/share.
That is a difference of $0.86 a share. Doesn’t seem like much, but when you own 78.89 million shares, it becomes a difference of $68 million in what is subject to the long term capital gains tax rate. At a 20% tax rate, that equals a cut in Jeff Bezos’ tax liability equal to approximately $14 million.
Meanwhile, Donald Trump is rescinding a cost of living pay increase for federal workers because of budget concerns:
President Donald Trump says he plans to freeze automatic pay raises for civilian federal employees in 2019, citing the need for government belt-tightening.
In a letter to Speaker of the House Paul Ryan, Trump said he is zeroing out both across-the-board pay increases as well as locality pay raises that are based on where federal employees live. The scheduled pay raises were set to go into effect in January 2019.
“We must maintain efforts to put our nation on a fiscally sustainable course, and federal agency budgets cannot sustain such increases,” Trump said in the letter.