Republicans need an issue that will excite voters, galvanize turnout and help the economy, big time. Here it is: Index the capital gains tax for inflation. At first flush, this hardly sounds like a barn burner. But if GOP candidates make the effort to learn how to swiftly explain it, voters will quickly catch on and Democrats will be thrown on the floor faster than Conor McGregor was in last Saturday’s ultimate Las Vegas fight.
The concept is basic: Let’s say you a buy a stock for $100 and sell it ten years later for $200, a gain of $100, you’d owe tax on that $100 gain. But let’s say inflation has doubled during that same period. Your real gain would be zero. In fact, the real value of your investment after paying taxes would be less than what it was when you bought the stock.
Why should you pay taxes on fake gains? Talk about unfair taxation! In fact, there’s a case to be made that taxing phony gains is a violation of the Constitution’s Takings Clause, which bars the government from seizing property without providing just compensation. You should only pay taxes on real gains, not fake ones. This should apply to financial assets, houses, farms, ranches, land and other forms of property.
The concept of indexing for inflation isn’t new. Each year Social Security benefits are adjusted for changes in the consumer price index, as are personal income tax brackets. The impact of indexing capital gains would be profoundly positive. Estimates of unrealized capital gains in assets owned by individuals are in the tens of trillions of dollars. There are roughly 88 million owner-occupied homes in the U.S. There are millions of small businesses, farms and ranches and tens of millions of people who personally own stocks. And most people own property that may have appreciated in price, especially in the form of jewelry. Every time the capital gains tax rate has been reduced, revenue from the tax has gone up. Why? Because the price of realizing a gain goes down, and therefore people are more willing to sell the asset.
Indexation would be a phenomenal tax cut for assets that have been held for years, such as a house. The burst in selling assets would generate a gusher of revenue for Uncle Sam. Indexation would also free up capital to be used for new opportunities. It would be a powerful stimulant of economic growth and innovation. Make no mistake, if indexation became a reality, every stockholder, homeowner, business owner or asset owner who might want to generate some cash would quickly calculate what their new actual cost basis would be.
How do we make indexing a reality? There’s a considerable legal case to be made for the Treasury Department’s doing it with a tax ruling. Of course, that would be challenged in the courts by political forces that love high taxes. But as people grasp the positive impact of indexation, the tax ruling would generate considerable political support to be passed through legislation, if necessary.
Despite all the positive benefits of issuing a ruling, the Trump administration has been very hesitant to do so. Some shortsighted officials fear being accused of pandering to the rich, even though it would benefit countless millions of Americans. Others fear a court challenge, even though it would be a powerful campaign issue.
For the sake of the country—and of his party—President Trump should order that the Treasury Department issue this tax ruling pronto.