Indexing Capital Gains to Inflation Just Another Tax Cut for the Wealthy

Shutterstock (Dmitry Guzhanin)

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Recently, conservative groups sent a letter to Trump asking him to again consider using his executive powers to index capital gains to inflation. Not only would this ridiculous proposal hand billions more in tax cuts to the wealthiest Americans, but it’s not even constitutional.

The letter argues that individual income tax brackets are adjusted for inflation, so capital gains, which are the profits from an investment, should be as well. What this means is that the value of an asset will be adjusted for inflation before it is taxed, so the owner is only paying taxes on the increase in value, not the increase in value and the increase due to inflation, therefore lowering the amount taxable. This would make sense if it weren’t for the implication that capital gains are the one thing not indexed to inflation, which couldn’t be farther from the truth. The federal minimum wage, for example, is not indexed to inflation. Plus, while individual income tax brackets are adjusted for inflation, the highest marginal rate on earned income is 37%, while capital gains are taxed at just 20%.

So while capital gains may be taxed without taking inflation into account, the tax rate on those earnings still end up being lower than what working Americans pay on their income. Indexing capital gains might sound fair (and might actually be fair if the capital gains rate was much higher), but advocating for indexing without any other changes is just advocating for cutting the tax bill paid by wealthy investors. Surprising no one, the letter fails to mention this disparity between how the tax code treats income earned through labor and income from etrade.com.

What the letter does hint at, however, is national economic gains should investors receive this tax cut. However, the fact of the matter is that investors will continue to invest regardless of their tax rate. This is because investors only have so many options. Besides investing, they could hide their money in the sock drawer, or place it in savings account or certificates of deposits. None of these options are anywhere near as lucrative as investing their money, even after considering the cut taken out in taxes. Investors will always be incentivized to invest as long as they’re making money. We should all be wary of another tax cut with the vague promise of economic growth as a result. If Republicans’ recent Tax Cuts and Jobs Act is any indication, a tax cut for millionaires and billionaires is just that– a tax cut for them. It will not and has not translated into any significant economic, wage, or job growth felt by average Americans.

So, not only are investors going to invest whether taxes increase, decrease, or stay the same, but it isn’t even in Trump’s legal authority to “implement inflation indexing unilaterally.” The power to lay and collect taxes belongs to Congress, not the President. If Trump felt capital gains being indexed to inflation was such a big deal, he should have made it an issue when he signed his tax overhaul into law in 2017. He also could have pressed the issue with Congressional leadership at any point during 2018 when his party maintained control of both chambers. The fact that he didn’t suggests Trump knew then and knows now it is just too hard to sell to his voters on yet another tax cut for billionaires.

This is because, by all accounts, the current tax system is already designed to benefit wealthy investors. These conservative groups’ letter to Trump asking for a further tax cut will only bring more attention to the fact that the wealthy continue to pay far less in taxes than they should. As such, they should know this $100 billion tax cut for the rich is the last thing our country needs, and shouldn’t even be on their or Trump’s radar. For Americans for Tax Reform, The American Conservative Union, FreedomWorks, Taxpayers Protection Alliance, and others to think now is a good time to lobby for another tax break for millionaires shows how out of touch they are with reality, as well as the millions of Americans who are tired of a tax code that gives every advantage to the ultra-wealthy..


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