Commentary

Trump Should End Capital Gains Inflation Tax

By Phil Kerpen | August 30, 2019 | 1:32pm EDT
(Photo by Chip Somodevilla/Getty Images)

Recent comments by President Trump have thrown some cold water on hopes that he will soon order the IRS to index the capital gains tax, ending the taxation of phantom, inflationary gains.

"I've studied indexing for a long time and I think it will be perceived - if I do it - as somewhat elitist. I don't want to do that," President Trump recently told a gaggle of reporters at the White House.

Does that mean the president now disagrees with his top economic adviser, Larry Kudlow, who has doggedly pursued capital gains indexing for years?  Does it mean advocates of the policy change should move on to something else?

Absolutely not.

The president's reluctance is directly related to dishonest headlines from news outlets that frame indexing as a tax cut for the rich.  The president is not concerned about the substance of the policy or his legal authority to implement it but rather the perception – the politics of it.

If there was any doubt that the president is still very much considering this big, beautiful tax cut that Nancy Pelosi can't stop, he put that to rest with a new trial balloon tweet just a week after his public comments. Trump asked if capital gains indexing was "An idea liked by many?" with a retweet of Steve Forbes linking to an article endorsing the idea written by Senator Ted Cruz and Americans for Tax Reform President Grover Norquist.

President Trump is conducting a live focus group on the issue.  He wants to know whether the media frame about "another tax cut for the rich" prevails among his supporters and the general public.

So we need to engage that argument and defeat it.  Fortunately the facts are on our side.

IRS data show 26 million tax returns paid capital gains tax in 2016, 80 percent of whom made less than $200,000 and 56 percent made less than $100,000.  And that understates how widespread the benefits would be because the majority of American households own long-lived assets like homes, mutual funds, and stocks that they will sell some day, representing years and possibly decades of accumulated value.  The year they sell they will be "rich" according to income – but only for that one year.  Taxing years or decades of inflation because a family looks rich on paper for that one year is wrong.

As Norquist noted in another recent article, the widespread benefits of indexing would be especially beneficial to Trump's base: "The present capital gains tax is particularly brutal to older Americans who bought a home, built a small business or invested in the stock market before the hyperinflation of the late 1970s... Those damaged most? Older voters. Rural voters. Midwest voters. Homeowners. Self-employed small-business men and women. A.k.a.: Trump voters in swing states. Inflation is a larger part of the capital gains taxes they pay."

Democrats are howling at the thought of President Trump bypassing Nancy Pelosi and ending the capital gains inflation tax via executive order – which he has acknowledged he has clear legal authority to do.  But Nancy Pelosi voted for capital gains indexing herself in 1992 – as did Maxine Waters, Bernie Sanders, and Chuck Schumer.  Was it "for the rich" then?

Schumer even gave a floor speech in support of the idea, saying: "If we really want to increase growth, there are proposals that we can do. I would be for indexing all capital gains."

The bottom line is that taxing inflationary gains is wrong and economically destructive – and President Trump has the power to fix it.  He should not be deterred by disingenuous Democrats or their media allies.

Phil Kerpen is the President of American Commitment and a leading free-market policy analyst and advocate in Washington, D.C.

Editor's Note: This piece was originally published by American Commitment.

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