Capital Gains Should Be Fixed, but Not by Trump

Just making the inflation adjustment would lower the average effective tax rate on capital, so Kudlow would find it more attractive than indexing and raising the rate above 23.8%. But the long decline of inflation has brought the effective rate down already. (One point of indexing would be to insure against high inflation in the future.) Holding the effective rate constant while applying it only to real increases in asset values would be an improvement on the status quo.

It's an improvement that Congress would have to legislate. Some conservatives think that a president has the power to implement indexing without congressional approval. The debate on this point has lasted decades: Conservatives tried to convince the George H.W. Bush administration to make the change on its own, but were rebuffed by his Treasury and Justice Departments. The statute says that capital-gains taxes are levied on an asset's sales price minus its cost; the question is whether "cost" is an ambiguous term that can mean the dollar price at which the asset was bought or the inflation-adjusted price.

The Chamber of Commerce argued back then that it was ambiguous, and that if the Bush administration interpreted it to call for an inflation adjustment the courts would be obliged to defer to the executive branch's interpretation. But the government's lawyers did not find it to be ambiguous at all. And anyway, the idea that courts should defer to executive interpretations of the law has been in retreat in recent years, especially among conservatives during the Obama era. So it's not clear that the Trump administration would prevail, or should, if it went for indexing.

But let's say that the Chamber had all the legal arguments just right in the early 1990s. The administration should still refrain from indexing by fiat. It would be a big change to a longstanding practice. It's a change that Congress could have made at any point since this debate broke out but has not enacted. Presidents should not exploit every power the law technically gives them to usurp the role of the legislature — to become, in effect, the legislator-in-chief.

President Trump should instead ask Congress, which his allies still control, to legislate the change. Indexing capital gains is a good idea, but it's not one worth further warping our constitutional order.

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Ramesh Ponnuru is a Bloomberg View columnist. He is a senior editor at National Review, visiting fellow at the American Enterprise Institute and contributor to CBS News.