Sunday, September 27, 2020

Bill Barr’s Greatest Legal Defeat

Bill Barr’s Greatest Legal Defeat

Over the course of his sterling legal career, Attorney General William Barr hasn’t lost very often in court. But looking back now, he may be savoring the memory of one notable defeat. That’s because a precedent from that case allows President Donald Trump to implement pro-growth tax reform immediately.

Mr. Trump seems eager to seize the day. “We are going to be looking at capital gains for the purpose of creating jobs,” the president said on Saturday. Then on Monday at his White House press conference, Mr. Trump elaborated that “we’re looking at also considering a capital gains tax cut, which would create a lot more jobs. So we’re looking very seriously at a capital gains tax cut and also at an income tax cut for middle-income families.” He added that a cap-gains tax cut would result in “a lot of people put to work.”

He’s right about that. Create a greater incentive to invest and you’ll get more investment, which encourages more job creation and higher wages. Here’s the opportunity for reform, thanks to Mr. Barr’s onetime courtroom disappointment: The administration can end the unfair method the Internal Revenue Service uses to calculate taxes on investment gains. Essentially, the IRS has been taxing not just gains, but also imaginary gains that are purely the result of inflation and represent no real gain at all for the investor.

This injustice to the taxpayer means that depending on when people buy and sell assets, they can sometimes end up paying taxes on “gains” that are entirely the result of inflation. So the government can reduce the value of the U.S. dollar and then tax a citizen’s losing investment as if it’s a winner.

The good news is that since tax law doesn’t precisely define the original “cost” of an investment, the Trump Treasury can reasonably decide to tax only actual gains, not imaginary ones. And the government’s ability to rationally define “cost” on an inflation-adjusted basis is stronger thanks to a losing case once brought by Mr. Barr.

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