Donald Trump’s renewed pledge to “Make America Great Again” requires nothing less than reigniting economic growth and prosperity. Wealth creation is essential. Yet as Congress prepares to extend and expand upon Trump’s landmark Tax Cuts and Jobs Act of 2017, he can take matters into his own hands by issuing an executive order to index capital gains for inflation.
Taxing inflationary “phantom” capital gains is an unfair and ill-advised policy that punishes risk and success.
Consider this: You invest $1,000, and after four years of Joe Biden in the White House, you sell that investment for $1,100. But since inflation raged during Biden’s tenure, the $1,100 you receive will be worth less in real terms than the $1,000 you invested. And yet, under current law, you will pay a tax on your $100 capital “gain.”
Talk about perverse!
“As has been well documented,” writes Alan Auerbach, University of California economist, “realized capital gains may be subject to tax rates that easily exceed 100% of real gains in the presence of inflation.”
But it’s the law. And not only would eliminating it be the fair thing to do for investors, it would ignite a surge of American prosperity.
Eight years ago, the late Treasury economist Gary Robbins estimated that indexing capital gains for inflation would, by 2025, create an additional 400,000 jobs, grow the U.S. capital stock by $1.1 trillion and boost GDP by roughly $500 billion. Because capital gains were never indexed, average household income today is $3,600 lower than it could have been otherwise.
However, it’s never too late to start doing the right thing.
Congress has repeatedly toyed with indexing capital gains. In fact, indexing capital gains used to be a bipartisan issue. In the early 1990s, congressional Democrats touted indexing as an effective way to boost economic growth and benefit workers.
“If we really want to increase growth,” said a youthful Chuck Schumer, the then-future Senate minority leader, “there are proposals that we can do. I would be for indexing all capital gains, savings and borrowings.”
Having mastered the ways of the D.C. swamp, Schumer now opposes indexing capital gains. Listen to Congressman Schumer, not Senator Swamp.
Indeed, as Trump emphasized in 2019, “Indexing is something that a lot of people have liked for a long time. It’s something that would be very easy to do. It’s something that I am certainly thinking about.”
Looking forward, the Congressional Budget Office estimated last month that federal capital gains tax receipts will total $2.8 trillion over the decade ahead. If only one-fourth of those tax receipts—a conservative estimate—are due to taxing phantom gains, American taxpayers will pay $700 billion in taxes on income that doesn’t exist.
Opponents of capital gains indexation say the subsequent revenue loss would be too great. But inasmuch as inflationary gains should not have been taxed in the first place, a revenue loss is a good thing. It represents the correction of a tax injustice.
The second-order effects that Robbins documents should remove any reservations based on revenue loss. Without the federal tax on inflationary gains, asset prices will adjust until they reach a new, higher equilibrium. Investors will see their portfolios appreciate bigly.
It’s a safe bet that millions of American investors and pensioners would choose a Dow Jones average of 50,000 with indexation over a Dow Jones average of 44,500 without indexation.
As taxpayers realize real capital gains, the federal government will collect billions of dollars in new tax revenue. Federal tax revenue may ultimately be higher with indexation, not lower.
There is the question of whether Trump has the legal authority to issue an executive order instructing the Treasury secretary to issue new regulations indexing the capital gains cost basis for inflation. It comes down to whether the governing Internal Revenue Code section covering the definition of the word “cost” is sufficiently ambiguous to allow regulatory reinterpretation. Congress never specifically mandated that “cost” was to be determined in nominal terms, nor did it prohibit the use of real valuation.
According to a watershed 2012 paper by Charles Cooper and Vincent Colatriano in the Harvard Journal of Law & Public Policy, “jurisprudential developments over the last two decades have confirmed . . . that Treasury has regulatory authority to index capital gains for inflation.” With that justification, Trump has little reason to hold back.
James Carter is a principal with Navigators Global. He previously headed President Donald Trump’s tax team during the 2016-17 transition and served as a deputy assistant secretary of the Treasury for then- President George W. Bush.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
All content created by the Daily Caller News Foundation, an independent and nonpartisan newswire service, is available without charge to any legitimate news publisher that can provide a large audience. All republished articles must include our logo, our reporter’s byline and their DCNF affiliation. For any questions about our guidelines or partnering with us, please contact [email protected].
