AMERICA’S GROWTH AGENDA
Part Three: Allow Investors to Index the Basis of
Their Capital Gains to Inflation
Proposal: Capital assets sold in 2008 would have their bases adjusted for inflation
Current Law
Since the origins of the income tax in 1916, Congress has nearly always allowed a special treatment for capital gains income. “Capital gains” is nothing more than profit a taxpayer receives from the sale of an asset.
The reason for this special treatment is twofold: first, many capital assets are corporate stocks—stocks of companies that have already paid the corporate income tax. Second, and more important for these purposes, is that there has never been a way to properly-account for the effects of inflation on this “profits tax.”
Example
Joe buys a share of XYZ stock for $100. Ten years later, the stock is worth $125. He sells the stock, and reports a $25 capital gain.
Meanwhile, inflation has occurred. Joe would have to spend $130 today to get the same value as $100 back when he bought the stock. So even though he lost $5 after inflation, Joe still has to pay taxes on his $25 “profit.”
Pro-Growth Solution
Allow Joe to increase his basis in XYZ stock by the rate of inflation. When he sells the stock, he would actually report a $5 loss. This reflects the actual economic reality for Joe, who is otherwise being taxed purely on inflationary gains.
A very good economic growth idea would be to allow all assets sold in 2008 to have their bases adjusted for the effects of inflation over the years. Some have calculated that this would be the equivalent to a cut in the capital gains tax rate of 50%.
There is some evidence that the Treasury Department could do this unilaterally, so a dual-track approach (Congressional Republicans and the Administration) would be an ideal scenario.
Fun Fact: This bill was actually introduced by Congressman David Dreier as H.R. 44 in the 108th Congress.