Republicans need an issue that will excite voters, increase turnout and help the economy, big time. Here it is: Adjust the capital gains tax for inflation. At first, this hardly sounds like a barn burner. But if the GOP candidates make the effort to learn how to explain it quickly, voters will quickly catch on and Democrats will be thrown to the floor faster than Conor McGregor in Las Vegas’ ultimate fight last Saturday.
The idea is basic: Say you buy a stock for $100 and sell it ten years later for $200, a $100 gain, you’ll owe tax on that $100 gain. But suppose inflation has doubled over the same period. Your actual profit would be zero. In fact, the actual value of your investment after taxes would be less than it was when you bought the stock.
Why do you have to pay taxes on bogus profits? We are talking about unfair taxation! In fact, there is a case to be made that taxing false earnings is a violation of the Constitution’s Takings Clause, which prohibits the government from seizing property without providing just compensation. You should only pay taxes on real earnings, not fake ones. This should apply to financial assets, houses, farms, ranches, land and other forms of property.
The concept of inflation indexing is not new. Each year Social Security benefits are adjusted according to changes in the consumer price index, as are personal income tax brackets. The impact of capital gains indexation would be profoundly positive. Estimates of unrealized capital gains on privately owned assets are in the tens of trillions of dollars. There are approximately 88 million owner-occupied homes in the US. There are millions of small businesses, farms and ranches, and tens of millions of people who personally own stock. And most people have real estate that may have appreciated in value, especially in the form of jewelry. Whenever the capital gains tax rate is reduced, tax revenue increases. Why? Because the price of making a profit falls and therefore people are more willing to sell the asset.
The indexation would be an amazing tax cut for assets held for years, such as a home. The boom in asset sales would generate a large income for Uncle Sam. The realignment will also free up capital to be used for new opportunities. It would be a powerful stimulus for economic growth and innovation. Make no mistake, if indexation were to become a reality, any shareholder, homeowner, business owner, or asset owner looking to generate some cash would quickly calculate what the new true cost basis would be.
How do we make indexing a reality? There is an important legal case for the Treasury to do this with a tax ruling. Of course, this will be challenged in the courts by political forces that love high taxes. But as people realize the positive impact of indexation, the tax decision will generate significant political support that will be passed through legislation if necessary.
Despite all the positive benefits of a ruling, the Trump administration has been very reluctant to do so. Some short-sighted officials fear being accused of pandering to the wealthy, even though it would benefit countless millions of Americans. Others fear a lawsuit, even though it would be a powerful campaign issue.
For the sake of the country—and his party—President Trump should order the Treasury Department to issue this tax ruling pronto.
