Today, Americans pay taxes when they sell an asset for more than they paid for it. The difference between what they sold it for and what they paid for it is the “gain” that they pay taxes on. Unfortunately, this “gain” includes not just a true gain, but also inflation, a phantom gain. Americans today are therefore paying taxes on inflation, a large percentage, in fact. Some have estimated that about a quarter of the tax revenue from capital gains in 2016 was from inflation.
Indexing capital gains would end the tax on inflation and help all Americans.
Many Americans own prized assets that they keep for a long time in order to increase their value. These assets include toys passed down from generations, letters, etc. Just think of the TV show Antiques Roadshow! These Americans should not have to pay taxes on inflation.
Further, many Americans would benefit indirectly from indexing capital gains to inflation. Many real estate owners currently hold onto property that they wish to sell because they don’t want to pay the taxes on inflation. If this property were sold, however, the property would be put to a higher and better use, increasing the property values of everyone around them. Another example is when small businesses are acquired by larger firms and have to pay capital gains taxes.
In addition, over half of American households hold stock in their 401(k)s, IRAs, HSAs, 529 education savings accounts, etc. In fact, retirement accounts hold 37% of all corporate stock. The value of this stock would increase if capital gains were indexed to inflation.
Finally, former Treasury economist Gary Robbins has estimated the economic growth from indexing capital gains to inflation. He believes that indexing capital gains in 2017 would have added an additional 400,000 new jobs by 2025. U.S. capital stock would also have grown by $1.1 trillion, and the GDP would have increased by about $500 billion. He has concluded that the average household would have had an additional $3,600 as a result.
The Tax Cuts and Jobs Act was a similar idea that helped all Americans. The Tax Foundation estimates that over 200,000 full time jobs have been added in 2018 from the Tax Cuts and Jobs Act. Unemployment also has fallen to 4%, and there are now more job openings than individuals looking for a job. Further, an average American taxpayer will save over $1,000 from tax reform, and many Americans have received bonuses, higher wages or greater benefits. Finally, GDP is now growing at 4.1%.
Just as tax reform has lead to strong economic growth and helped all Americans, indexing capital gains to inflation would result in even more economic growth and prosperity.
See also: The Case for Ending the Inflation Tax