Don't hold your breath. 

President Trump recently made waves by suggesting his administration may use executive branch powers to effectively enact a capital gains tax cut in an interview with Bloomberg. Meaning: without consulting Congress.

The move, which involves adjusting the gain calculation to account for inflation, would mean folks who own stocks with large embedded gains accumulated over a long holding period would face a lower tax bill upon selling. Controversial! Some call it a gift to the rich. Others argue the move is sensible: Not adjusting for inflation means a portion of your capital gain isn't "real"-that is, it is just the impact of the dollar's gradual, long-term decline in purchasing power, yet you still have to pay taxes on it all in present-day dollars.

Whichever camp you sit in, though, Fisher Investments' view of the historical record suggests legal hurdles and political reality mean this change isn't likely to happen any time soon.

Most readers likely know America's Constitution stipulates matters of taxation are exclusively in Congress's purview. The White House can sign or veto a bill. They can set policy parameters for a potential bill. (See last year's Tax Cuts and Jobs Act.) But the executive branch cannot unilaterally enact a tax cut.

Everyone basically agrees with the four sentences in the paragraph above. So how could the Trump administration get around Congress? The executive branch has the authority to regulate and interpret legislation. Proponents argue this includes re-defining the calculation of "cost."

America has taxed capital gains since the income tax became a thing in 1913. Most folks think of this as present value minus what you paid to acquire the asset (your cost basis). The difference is capital gain, subject to tax. That is true enough, in practice, for financial assets. But some note it isn't technically this simple. The Revenue Act of 1918 says cost should factor in depreciation.

Hence some legal scholars raise the technical question: Isn't inflation just the dollar depreciating? The answer is the key. If so, then the administration could re-interpret capital gains tax law to add in some form of inflation adjustment raising the cost basis (and thus reducing capital gains incurred at sale).

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In Fisher Investments' view, this likely doesn't mean much for folks with short holding periods of just a year or a few years. We aren't in Venezuela, where inflation recently clocked in at 1,000,000% year over year. An inflation adjustment to prices paid in, say, 2016, wouldn't material raise cost basis. But longer term, it could.

As an illustration, consider the following hypothetical: An investor who bought a stock for $10,000 on August 31, 1978 that has appreciated to $250,000 now, 40 years later. (Not an outlandish sum, considering the S&P 500 price return over this span was 2,709%.i) So, $240,000 is subject to capital gains tax, if the stock-owner sells. At the current 15% long-term capital gains rate, this means a tax bill of $36,000, all else equal.

If the basis were indexed for inflation, however, you would see a different sum. Adjusting $10,000 for the change in the Consumer Price Index over this span boosts the basis to $38,131. This means $211,869 is subject to tax. At 15% rates, this is $31,780 -- a $4,220 reduction. That isn't the hugest cut in the world, but if the numbers were larger -- like a $1,000,000 basis from decades ago -- the impact could be far larger in dollar terms.

And that is where opponents come in, as larger numbers mean this move would benefit those with very large taxable portfolios most. Still, it is undeniably true the purchasing power of a dollar from 1978 isn't what it is today. That is why economists compare inflation-adjusted (real) GDP with figures from decades ago. And real wages. And so on.

However, Fisher Investments' historical research suggests the Trump administration will have a tough time enacting this, if they elect to try. This wouldn't be the first effort to do so.

In 1992, President George HW Bush investigated whether his Treasury Department could unilaterally act, as part of his re-election platform. Two different administration legal investigations-one conducted by Treasury, the other by the Justice Department-concluded, "Treasury does not have legal authority to index capital gains for inflation by means of regulation." Perhaps Trump's administration will interpret the law differently, but it seems likely to be challenged in court.

Now, Treasury Secretary Steven Mnuchin seemingly realizes this, as he has previously stated Congress should act on the matter. Yet, the Democrats categorically opposed last year's tax cuts. We suspect they would ardently oppose this. With the Republicans having a narrow edge in the House and Senate-and midterms only two months away-we doubt they would want to pass such a contentious bill now. As Trump told Bloomberg, "There are a lot of people that love it and some people that don't. But I'm thinking about it very strongly." And there is a fair chance the Republicans lose control of one chamber of Congress this November. If so, this idea likely dies.

So for all those reasons, if you were hoping for some marginal relief on capital gains stemming from Trump's reinterpreting the capital gains tax, we humbly suggest not holding your breath.

By: Aaron Anderson, Senior Vice President and Head of Research at Fisher Investments.

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