According to reporting in Tax Notes, Bloomberg Law, and others, Senators Ted Cruz (R-TX) and Tim Scott (R-SC) have written a letter to Treasury Secretary Scott Bessent (who, at least for a few more days, is also the acting commissioner of the IRS) advocating for the Trump administration to index capital gains to inflation by executive fiat. Senator Cruz has proposed bills in Congress that would do exactly this (repeatedly, year after year after year), but after apparently failing to convince most of his Senate colleagues of the wisdom of such a move, has resorted to lobbying another branch of government to accomplish the same end.
Indexing capital gains to inflation may well be justified as a policy matter. After all, to the extent that an asset’s value appreciates with the rate of inflation, a taxpayer has experienced no increase in real purchasing power; from a real Haig–Simons point of view, the taxpayer’s income would be zero. Of course, the fisc benefits enormously from taxing Americans on that hard-earned inflationary increase in their assets’ values, so moving to this scenario would not be costless. (In 2018, when the first Trump administration reportedly was considering doing this, the Penn Wharton Budget Model estimated that indexing capital gains to inflation would cost around $100 billion over ten years in foregone revenue.)
Setting aside whatever policy merits might be present, having the executive unilaterally reinterpret the law is of dubious legality. As a technical matter, the argument for indexing capital gains to inflation is rooted in section 1012 of the Code, which defines the basis of property as “the cost of such property” (subject to various adjustments provided elsewhere in the Code). While the Code does not define “cost” anywhere, it has long been interpreted to refer to the actual purchase price of such property, measured in nominal dollars. Proponents of indexing capital gains to inflation have seized on this lack of a formal definition and argued that “cost” should be measured dynamically—i.e., adjusting the initial investment upward to account for inflation.
Others have written on this topic before, and I won’t rehash the arguments in detail here. Daniel Hemel (NYU) and David Kamin (NYU) wrote “The False Promise of Presidential Indexation,” published in the Yale Journal on Regulation in 2019, which argues that “the legal authority for presidential indexation simply does not exist.” By contrast, Charles Cooper and Vincent Colatriano, both partners at Cooper & Kirk, PLLC, have argued that Treasury does have that authority in their 2013 article in the Harvard Journal of Law & Public Policy, and, with a third coauthor, Michael Carvin, in their 1993 article in the Virginia Tax Review.
My own view is that Hemel and Kamin have the better of the argument. Indeed, the Department of Justice has, for nearly thirty-five years, taken exactly this position: “The Department of the Treasury does not have legal authority to index capital gains for inflation by means of regulation.” That said, if the Trump administration were to attempt to index capital gains to inflation, it is less clear how such an action could be challenged, for two reasons.
First, as long as the inflation rate remains at or above 0%, the taxpayers who would experience economic harm from such a policy would be very small in number (and even smaller if the administration were to make indexing for inflation elective). Other classes of potential litigants that Hemel and Kamin suggest (e.g., lawmakers, states, persons subject to broker reporting rules) would face other hurdles, given that the “injury in fact” suffered by such potential litigants is more attenuated than direct taxpayer standing. Moreover, standing doctrine is sufficiently muddled that while these litigants would have non-trivial arguments for standing, there is little certainty that their claims would ever be adjudicated on the merits.
The second issue has to do with the Tax Anti-Injunction Act, I.R.C. § 7421, which generally prohibits taxpayers from seeking injunctive relief over the tax law. (It is admittedly more nuanced than that, but it is on account of the TAIA that tax law challenges are typically adjudicated through disputes between the taxpayer and the government, whether in the Tax Court, the Court of Federal Claims, or an applicable U.S. District Court.) While this is a familiar bar to challenging executive action in tax policy, it is not clear that the TAIA would apply in a challenge to indexing capital gains to inflation: After all, as Hemel and Kamin point out, non-taxpayer litigants would not be, strictly speaking, seeking an injunction “for the purpose of restraining the assessment or collection of any tax,” I.R.C. § 7421(a) (emphasis added).
None of this is to suggest that success would be assured for the Trump administration. After all, the last time the administration’s attempt to take ownership of the taxing power was reviewed by the Supreme Court, it ended up going quite poorly. Nonetheless, it strains credulity to believe that the Trump administration would feel bound by a 34-year-old OLC opinion, and if it felt like there was sufficient political benefit to indexing capital gains to inflation, I have little doubt that the Trump administration will attempt to do so. If it does, I suspect the road to challenging such an action would be significantly more fraught than those litigants who challenged the IEEPA tariffs.
