While much of the attention in Washington D.C. has turned to the GOP’s “Tax Cut 2.0” blueprint, yesterday The New York Times reported that a “Tax Cut 1.5” may be in the works. According to the story, the Trump administration is considering a unilateral move to index capital gains to inflation.
As I have written before, indexing capital gains to inflation would be a huge move to turbocharge economic growth. Currently, when individuals invest in stocks (without using a tax-exempt vehicle like a 401k) or real estate, they are subject to real capital gains taxes on fake gains. This is because the IRS does not account for any devaluation in the dollar (inflation) when calculating the net-profit on an investment. This tax bill gets extremely costly when compounded over years or decades.
In addition to cutting taxes, this policy is also pro-growth because it adds greater certainty to the market. One will no longer need to factor to what extent inflation could erode potential gains prior to making a long term investment.
As Tea Party Patriots founder Jenny Beth Martin wrote for The Hill:
Inflation is one of the favorite tools of the Washington swamp. The government causes inflation by expanding the supply of money faster than the increase in goods and services. That leaves too many dollars chasing too few goods, which leads to price increases, as buyers bid up what they are willing to pay for scarce goods. Why not? They have more dollars in their pockets, even if they lack purchasing power.
Additionally, National Economic Council Director Larry Kudlow showed support for this idea last year when he wrote:
President Trump’s absolutely best economic policy so far has been his relentless rampage against onerous, burdensome, costly, prosperity-killing regulations on business. And the taxation of inflationary capital gains fits right in there. It is an unfair and misguided policy that punishes risk and success. The president should use his executive authority — as he so often has to drain the swamp — to remove this prosperity-killing practice.
And Americans for Tax Reform President Grover Norquist articulated the benefits of indexing capital gains to inflation, stating:
This would be in terms of its economic impact over the next several years, and long term, similar in size as the last tax cut… I think it’s going to happen and it’s going to be huge.
Indexing capital gains to inflation is likely the single-most pro-growth policy that stands a shot at being enacted this year, since President Trump can enact it via executive order. While Treasury Secretary Steven Mnuchin has shown a desire to try to go through Congress first, why wait? The latest GDP numbers show that Trump’s economic policies are working, and the administration should keep the ball rolling by indexing capital gains to inflation as quickly as possible.
Photo credit: Gage Skidmore