Treasury Secretary Steven Mnuchin. (Photo: AP) Treasury Secretary Steven Mnuchin. (Photo: AP)

Senate Democrats are warning Treasury Secretary Steven Mnuchin against bypassing Congress to index capital gains rates to inflation, a move the 42 lawmakers argue is “an illegal action that would defy longstanding Justice Department policy.”

In their Wednesday letter, the senators state that “indexing capital gains would double down on the 2017 $1.5 trillion tax giveaway with at least another $100 billion tax cut. According to the Penn-Wharton Budget Model, more than 86% of the benefit of indexing capital gains would go to the top 1% of taxpayers, while just 2.5% of the benefit would go to the bottom 90% of Americans.”

The Democratic senators’ request follows a July 29 letter signed by 21 Republican senators urging Mnuchin to circumvent Congress and index capital gains rates to inflation.

President Donald Trump said in late July that the White House is developing a plan to do so. The change could be made through a rulemaking or executive order, but such a move would likely be challenged in court.

The Democratic senators told Mnuchin in their letter that the move would also “almost exclusively benefit the wealthiest Americans, add to the ballooning federal deficit [and] further complicate the tax code.”

Citing the Congressional Budget Office, the senators wrote that the 2017 tax cuts are not paying for themselves through increased revenue. “The FY 2019 deficit is projected to be $896 billion, up from $666 billion in FY 2017,” they said. “Cutting capital gains taxes for the wealthy by indexing gains would only exacerbate this problem.”

While indexing capital gains “would unquestionably add to the deficit, the $100 billion price tag is a conservative estimate because it does not consider the resulting tax sheltering opportunities,” the senators wrote.

“If Treasury indexes capital gains for inflation but does not also index capital expenses, like interest and depreciation, taxpayers would only pay taxes on the real portion of their gains while still deducting their full, nominal expenses. Taxpayers could therefore use their losses on paper to offset tax owed. Indexing both gains and expenses for inflation, meanwhile, would increase the tax code’s complexity and the compliance burden on taxpayers.”