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Global Public Policy

Trump still considering indexing capital gains

September 6, 2019

In August, President Donald Trump suggested again that he might direct the Treasury Department to issue guidance indexing capital gains for inflation. 

The George H.W. Bush Administration contemplated such a move in the early 1990s but ultimately determined that it lacked the authority to do so. Nonetheless, indexing capital gains for inflation has remained a goal of certain policymakers. In July, Senator Ted Cruz (R-TX), joined by 20 Republican senators, wrote Treasury Secretary Steven Mnuchin and urged him to use executive authority to make the change in order to “unlock capital for investment, increase wages, create new jobs, and grow the economy.” 

A group of Democratic and Independent Senators have sent their own letter opposing the move. If the Administration moves ahead unilaterally it will almost certainly be challenged in the courts. 

At the most basic level, a capital gain is the difference between the sales price of an asset and its purchase price (i.e., its basis). Proponents argue that inflation creates phantom gains. Sen. Cruz cites an example of 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.

Tax experts note that part of the justification for a lower capital gains rate is to account for inflation. Further, the effort to eliminate the taxation of phantom gains would necessitate changes to prevent the creation of phantom losses. Previous legislative attempts also looked to stem potential abuse through loss limitation and interest limitation provisions. These measures are imperfect, however, and would further complicate the tax code.

According to the Tax Foundation, indexing capital gains to inflation would provide a modest boost to economic growth but reduce federal revenue by $148 billion over the next decade. The largest increase in after-tax income would go to the top 1% with an increase of 0.83%.

Phillips Hinch

Vice President, Tax Policy