In Washington, Some Proposals Like Indexing Capital Gains are Worth Fighting For

Tim Andrews

September 3, 2019

For the past eight years, the Taxpayers Protection Alliance (TPA) has tackled many issue areas, made plenty of enemies (and friends), and forced organizations like the United States Postal Service to go on the defensive. Too often, ill-considered policies such as tariffs hog the limelight at the expense of promising proposals such as capital gains indexation. Free-market groups such as TPA, and policymakers, must take a forceful stand against government meddling in the economy while championing continued tax reform. The job isn’t easy, but politicians must be held accountable for the bad and the good. 

There are certainly plenty of bad economic policies promulgated by Washington “leadership.” This is a particular disappointment considering the immense impact pro-taxpayer policy has had over the last two years. For example, as a direct result of the Tax Cuts & Jobs Act, hundreds of businesses increased wages or issued bonuses, whilst utilities lowered prices for consumers.  Economic growth soared to 3 percent.  Unemployment is at its lowest in almost half a century, with over five and a half million new jobs created, and the number of job openings at its highest in at least 18 years.

Sadly, all this economic progress looks increasingly under threat as President Trump increases import taxes on American consumers and manufacturers under the guise of his “trade war” with China. New tariffs, which will cost U.S. families $1,000 a year, will almost certainly wipe out almost all the gains the tax cuts have made. Unable to dissuade Trump from this disastrous policy, spooked White House officials have been trying to find other ways to avert an increasingly-likely looking recession

Given the prevalence of these half-baked ideas, it was heartening to hear the news that the administration was considering indexing capital gains tax to inflation. The fact that the capital gains tax isn’t indexed means that investors are taxed on gains that only exist on paper and not in reality. After all, gains that simply “accrue” due to inflation are not real gains at all, and the Internal Revenue Service should not conflate these illusory gains with real earnings. The average effective capital gains tax rate excluding gains based on inflation was 42.5 percent between 1950 and 2012, nearly twice today’s 23.8 percent top capital gains tax rate.

Fixing this would lead to an immediate economic boom as businesses would rapidly invest and hire more workers. Indexing the tax would also immediately benefit millions of middle income households that rely on their investments to retire and hopefully pass along an inheritance to their children. To highlight these benefits, 51 free market groups wrote to Trump earlier this year urging him to take action. So it’s disappointing that it seems Trump backtracked on this last week and denied wanting to index the capital gains tax.  

To keep the economic momentum created by the historic tax cuts, President Trump should push for capital gains indexation and end the foolish trade war and cut import taxes. Free-market groups must continue to push back against misguided policy, and champion promising alternatives that would save millions of Americans billions of dollars.