To Keep the Economy Growing, Index Capital Gains to Inflation

The Bureau of Labor Statistics earlier this month released its July jobs numbers confirming that we remain in the midst of the longest economic expansion in U.S. history. The expansion is clearly paying off for Americans of all walks of life.

Just look at the mounting evidence.

Unemployment is at a 50-year low. Family incomes are on the rise, increasing by 3.2 percent over the past year. Businesses are investing more in our local communities, creating 2.6 million jobs just last year. Perhaps this is why “most Americans remain confident about the U.S. economy and in their own financial situation,” crediting many of the policies President Trump and the Republican-led Congress have championed, as a recent CBS News poll found.

Some policymakers in Washington are content to stop there. And some are bent on turning back the clock altogether.

But many are not interested in resting on our laurels or worse, forfeiting the progress that has already improved the lives of hardworking families across the country.

There is still much untapped potential across our economy, and we’re committed to unleashing it. 

One such way to do that is by eliminating the unfair “inflation tax,” a practice that penalizes Americans of all walks of life – from workers saving for retirement to farmers and ranchers selling off a parcel of land to acquire capital for new equipment and machinery that would help grow their family business.

Here’s how the “inflation tax” works today. When a taxpayer sells a capital asset, they pay taxes on their gains—the difference between the basis and the sale price. Under current rules, Treasury determines the basis by looking at the sticker price at the time of purchase without consideration of the inflation-adjusted cost of the asset in today’s dollars.

So what does that mean for taxpayers? You end up being taxed on illusory income as the result of economy-wide price-level increases.

Imagine, for example, a taxpayer who purchased one share of Coca-Cola stock in 1998 for $32.38. If they sold the stock earlier this year at $48.13, they would have a nominal gain of $15.76 and be taxed $3.75. The inflation-adjusted basis in today’s dollars, however, would be $50.50. That means the taxpayer would have to pay $3.75 in taxes on a $2.38 loss. Even when a taxpayer experiences a real gain, the effective capital gains rate can easily double the statutory rate passed by Congress.

In other words, taxpayers are being punished for the mere existence of inflation. That’s why over the years, other provisions in the tax code, including income tax brackets, the standard deduction, and the Earned Income Tax Credit, account for the effects of inflation. Treating capital gains taxes the same way should be a no-brainer.

Of course some on the Left have a different take. Their entire expansive, big government agenda is based on raising your taxes. Indeed, when one of us sent a letter with 20 U.S. senators urging the administration to use its authority to make this change, the media seized the opportunity to amplify Democrats’ alarmist rhetoric, labeling the policy a tax cut for the one percent (where have we heard this false claim before?).

Last week, President Trump publicly repeated that he has the legal authority to make the change ending the taxation of inflation in capital gains by administrative action. Two recent Supreme Court decisions in 2002 and 2019 make that clear. The president did express concern that Democrats would attack the reform as only helping the wealthy. But history and basic economic facts make it clear that this action would benefit tens of millions of Americans directly through more jobs and income.

Here are some points Democrats conveniently fail to mention.

The Republican-led Tax Cuts and Jobs Act actually made the tax code more progressive. Millionaires saw the share of federal taxes they pay go up (from 19.3 to 19.8 percent), while those making less than $50,000 per year saw their share of federal taxes go down (from 4.4 to 4.1 percent).

Indexing capital gains to inflation continues that progress. In the near term, not only will this change directly benefit the 54 percent of Americans that own stocks, it will also benefit the 55 million Americans who own a 401k. 

Over the longer term, a capital gains tax cut spurs the growth of new businesses, increases the wages of workers, enhances consumer purchasing power, and grows the economy at large, resulting in more overall gains to be taxed.

It’s no wonder the Democrats supported the policy in the past.

Even Senate Minority Leader Schumer said as a Member of the House in 1992 that “if we really want to increase growth, there are proposals that we can do. I would be for indexing all capital gains and savings and borrowing.”

We agree, and we urge the administration to do just that.