Americans for Tax Reform today sent the following letter of endorsement to Cong. Joe Walsh (R-Ill.)

On behalf of Americans for Tax Reform, I am pleased to support H.R. 2945, the “Capital Gains Inflation Relief Act of 2011.”  I would urge all Congressmen to co-sponsor and vote for this legislation.

Your bill would allow a shareholder to index the basis of his investment to inflation when calculating any capital gain or loss at sale.  In practice, this would end the taxation of merely-inflationary capital gains.  Because no real value was added to an asset merely because of inflation, no additional taxes should be owed as a result merely of inflation.  This is a sound principle of taxation, and represents a pro-growth update of our tax laws.

If an investor purchases a stock for $100, and later sells that same stock for $400, he must report and pay taxes on a $300 capital gain.  However, some of that gain is merely due to the effects of inflation over the years.  In many cases, much or all of a capital gain is merely inflation.  With an historical inflation rate of 3%, inflation halves the real value of all assets every 24 years.  While this is bad enough, it adds insult to injury to have to pay taxes merely on inflated gains.

It is important to note that some legal scholars believe that inflation adjustment of basis for capital gain purposes can be done on the regulatory level.  While that may or may not be possible, it’s also essential that a common-sense step such as this be put into the tax statute.

What do you think?  Should investors have to pay capital gains tax on that portion of their gain which is derived merely from inflation?

Letter PDF