A study already threw cold water on the biggest argument for Trump's $100 billion tax cut

  • President Donald Trump is considering a plan to index capital gains taxes to inflation, which would result in a $100 billion tax cut that would mostly benefit wealthier Americans.
  • One of the arguments for the cut is that lower taxes on investments would spur economic growth.
  • However, a study by the Congressional Research Service showed that such a tweak in the tax system would do little to boost the economy.

President Donald Trump is considering a tax-cut plan whose advocates say would spur economic growth. But at least one study has cast doubt on that argument for the plan, which would result in a massive tax cut for mostly wealthier Americans.

The Trump administration plan would index capital gains taxes to inflation, meaning investors would be able to adjust for inflation the initial amount they paid for an asset when selling the asset and paying taxes. The move would result in a roughly $100 billion tax cut over the next 10 years. 

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U.S. President Donald Trump addresses the crowd during a rally in Tampa, Florida, U.S., on Tuesday, July 31, 2018. Iranian Foreign Minister Javad Zarif pushed back on Trump's suggestion that he'd be willing to meet President Hassan Rouhani with 'no preconditions,' saying the two countries spent plenty of time in negotiations already. Photographer: Zack Wittman/Bloomberg via Getty Images
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U.S. President Donald Trump addresses the crowd during a rally in Tampa, Florida, U.S., on Tuesday, July 31, 2018. Iranian Foreign Minister Javad Zarif pushed back on Trump's suggestion that he'd be willing to meet President Hassan Rouhani with 'no preconditions,' saying the two countries spent plenty of time in negotiations already. Photographer: Zack Wittman/Bloomberg via Getty Images
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Attendees stand in line ahead of a rally with U.S. President Donald Trump in Tampa, Florida, U.S., on Tuesday, July 31, 2018. Iranian Foreign Minister Javad Zarif pushed back on Trump's suggestion that he'd be willing to meet President Hassan Rouhani with 'no preconditions,' saying the two countries spent plenty of time in negotiations already. Photographer: Zack Wittman/Bloomberg via Getty Images
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Advocates of the plan have a fairly straightforward supply-side economic argument in favor of it: Cutting taxes on investments would put more money in the pockets of Americans to spend elsewhere, helping to boost economic growth.

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Given the Trump administration's long-rumored interest in the plan, Jane G. Gravelle, a senior specialist in economic policy at the Congressional Research Service, investigated the idea in June. Gravelle found that little economic benefit would result from the change.

According to the CRS report, Trump could implement inflation indexing in a variety of ways, but any version of it would result in little economic growth. If inflation indexing for capital gains was introduced on its own — as it appears the Trump administration wants — Gravelle said there would be no boost at all.

Even if inflation indexing was implemented in concert with other changes to the tax code, Gravelle found the "growth effects would be relatively small."

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The report said the tweak in the tax system would not incentivize new investment, but rather incentivize savings.

From Gravelle's report:

In addition, unlike some other tax cuts (such as expensing or corporate rate cuts) that occur at the firm level and have the potential to draw capital from abroad as well as potentially increase saving, capital gains are on the savers side, which means their effects operate solely through saving with some of that saving leaking into investments in other countries. Capital gain effects are also limited because of evidence that savings is not very responsive to changes in rates of return.

Gravelle wrote that some tweaks of the general idea — such as having the index only apply to new purchases after the change goes into effect — could help boost the economic jolt. But indexing alone would do little for the economy at large.

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