Just what we need: more economic inequality

The White House is reported to be planning to unilaterally adjust the way capital gains are assessed to benefit the wealthiest Americans. The proposal would adjust capital gains for inflation, reducing taxes disproportionately for the wealthiest households who own most assets by limiting their taxable gains to those above and beyond the inflation rate.

[...]

The plan, which has long been rumored but apparently is now more serious and detailed, is for the administration to change—through regulatory action, not legislation—the definition of capital gains to exclude gains that reflect inflation. This was considered during the administration of George H.W. Bush, but officials then decided that the move would likely not be legal—that the definition of gains in statute is quite clear and does not provide much room for interpretation. The Trump Administration apparently is ignoring this history and plowing ahead.

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To understand [the] argument [for indexing capital gains], imagine that you buy something for $5 million and then 10 years later you sell it for $9 million. Under our tax rules the $4 million profit you made from selling it is a capital gain, which is subject to federal income tax.

However, imagine that the inflation rate during the ten years is 6 percent annually. In this case, when you sell the asset for $9 million, you are only keeping up with inflation. You have not genuinely profited, they argue, when inflation is considered. You cannot buy more with the $9 million in proceeds from the sale than you could buy with $5 million a decade ago. So, the argument for excluding such gains from taxable income might initially seem compelling. But dig a little deeper and the argument falls apart.

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Let’s expand upon the example above: You purchase an asset for $5 million and sell it for $9 million a decade later. Over the same time period, your friend puts $5 million in a savings account that pays an interest rate of roughly 6 percent on average, the same as the rate of inflation. If there was no income tax, both you and your friend would have approximately $9 million at the end of the decade. You would have $4 million in capital gains and your friend would have $4 million in interest. In both cases, you might argue that the income really just reflects inflation and should not be taxed.

In the real world, both types of income are taxed but the interest is taxed more.

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The figures in this table assume that both capital gains and interest are taxed at ordinary income tax rates. In reality, the capital gains in this example would be taxed at lower rates under current law.

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Let’s say you and your friend got together and figured out how you could profit from this mismatch in the tax code. You borrow $5 million from your friend and pay her 6 percent interest, which over a decade comes to $4 million. At the end of the decade you sell the asset for $9 million, meaning your gain of $4 million exactly equals the $4 million in interest you have paid. As has always been the case, you are allowed to deduct the $4 million in interest payments as a business expense. But now, thanks to the Trump administration, you no longer owe income tax on the $4 million in gains because gains would be taxed only to the extent that they exceed inflation.

In fact, you would even be willing to pay your friend a higher interest rate to lure her into the deal, so you effectively split the profits from your tax arbitrage. Thus, you have an incentive to make investments that do not make any sense economically but only become profitable because of inconsistent tax rules.
  ITEP

As Himself famously said, "That makes me smart."

Donald Trump surely remembers a time in the 1980s when the tax code encouraged such inefficient decisions by wealthy investors—the construction of empty buildings and other investments that were profitable only as tax shelters. President Reagan’s Tax Reform Act of 1986 cleared most of those tax shelters away, and Trump testified before members of Congress calling that tax reform a “catastrophe.” In turn, his approach to taxes today is, unfortunately, hardly surprising.

The Trump Administration faces mounting pressure from conservative thinkers and activists — including calls from its own National Economic Council director — to promulgate a U.S. Treasury Department 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.

  SSRN (Yale Journal)

Get ready for more legal challenges.  Another reason to pack those courts.  (Sen. Michael Bennett, running for president in 2020, recently said that literally the only thing they're getting done in the Senate is installing federal judges.  Those are the only votes Mitch McConnell will bring to the floor.)

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...but hey, do what you want...you will anyway.