Today, Senator Ted Cruz (R-Texas) introduced the Capital Gains Inflation Relief Act, a bill that would index many assets to inflation to protect taxpayers from paying taxes on inflationary gains. Rep. Warren Davidson (R-Ohio) introduced the same bill in the House of Representatives.
Senate cosponsors of this bill include Sens. Thom Tillis (R-N.C.), Mike Braun (R-Ind.), John Barrasso (R-Wyo.), Pat Toomey (R-Pa.), Jim Inhofe (R-Okla.), and James Lankford (R-Okla.).
“Senator Cruz should be commended for reintroducing the Capital Gains Inflation Relief Act. Not only does this bill end the unfair practice of taxing inflationary gains, but it will help grow the economy by encouraging saving, investment, and innovation. It is always a good idea to index capital gains to inflation but because of Joe Biden’s inflation, it is more important than ever to do it now,” said Grover Norquist, President of Americans for Tax Reform.
Senator Cruz’s legislation would index to inflation any common stock in a C corporation, digital assets, and any tangible property which is a capital asset or property used in the trade or business.
This bill is incredibly important, as the taxation of phantom gains has distortionary, perverse effects on investment. For example, it creates a “lock-in” effect, discouraging investors from selling their assets. This prevents investors from productively moving their money to invest in newer, more promising companies. It also discourages investors from investing in companies, particularly long-term investments. Stifled investment has a plethora of negative outcomes: slowed wage growth, new business growth, lower retirement account values, etc.
Inflation comprises a significant portion of capital gains taxes. In 2019, ATR calculated that inflation would have comprised 70 percent of the tax owed on IBM shares purchased in 1970, 64 percent of the tax owed on Exxon Mobil shares purchased in 2000, and the entire gain of Coca-Cola shares purchased in 1998.
Senator Cruz’s legislation is especially important now given inflation is running rampant. In September, the consumer price index increased by 5.4 percent on an annualized basis. The cost of gasoline has increased 42.1 percent in the past 12 months, used cars and trucks have increased 24.4 percent, while meats have increase 12.6 percent.
These trends will also erode the returns investors will get after selling and paying taxes on assets.
Interestingly, even current Senate Minority Leader Chuck Schumer (D-N.Y.) once supported ending inflation tax on capital gains. In a 1992 video then-congressman Chuck Schumer stated:
“If we really want to increase growth, there are proposals that we can do. I would be for indexing all capital gains and savings and borrowing.”
Current House Majority Leader Steny Hoyer (D-Md.) also supported indexing capital gains to inflation in 1992. He said:
“The capital gains provisions in H.R. 4287 benefit small business by indexing newly purchased assets. Income gauged would be much more reliable so that, real not inflationary gains will be taxed, and taxed at the same 28 percent maximum rate on gains.”
The federal government should not continue their unfair practice of taxing phantom gains. Congress must act in order to protect retirees and investors from the rampant inflation they created. All lawmakers should support Senator Cruz’s Capital Gains Inflation Relief Act, spurring investment, economic growth, and innovation.