JAMES CARTER: A Crucial Tax Code Change That Could Ignite America’s Economic Resurgence

By James Carter |

Donald Trump has reaffirmed his commitment to “Make America Great Again,” aiming to stimulate economic growth and enhance prosperity. As Congress prepares to revisit the Tax Cuts and Jobs Act of 2017, Trump has the opportunity to issue an executive order that would allow for the indexing of capital gains to inflation.

Current policies that tax inflation-driven capital gains are often viewed as unjust. Take, for instance, an investment of $1,000 that appreciates to $1,100 after four years. Due to inflation during that period, the real value of the investment may effectively be lower than the original amount, yet taxpayers are still liable for taxes on the nominal gain of $100. This scenario highlights a critical economic flaw.

Economist Alan Auerbach from the University of California notes, “realized capital gains may be subject to tax rates that easily exceed 100% of real gains in the presence of inflation.” This reality demands urgent attention, as reforming this aspect of taxation could invigorate American economic growth.

Eight years ago, Treasury economist Gary Robbins projected that indexing capital gains could add 400,000 jobs by 2025, increase the U.S. capital stock by $1.1 trillion, and elevate GDP by $500 billion. The absence of such indexing has resulted in average household incomes falling short by $3,600 compared to potential levels.

History shows that Congress has considered capital gains indexing a bipartisan concern. In the 1990s, prominent Democrats advocated for it as a solution for economic growth. Chuck Schumer, now Senate minority leader, previously supported such measures, stating they could stimulate significant economic expansion.

Despite Schumer’s shift in stance, Trump asserts that indexing remains a viable and beneficial option. His statement in 2019 underscored a broad interest in indexing from various stakeholders, establishing that it could be easily enacted.

Looking ahead, the Congressional Budget Office recently estimated that federal capital gains tax receipts could hit $2.8 trillion over the next decade. If a conservative estimate holds true, one-fourth of this total derives from taxing gains that are, in fact, illusory due to inflation. Consequently, the projected burden on taxpayers could reach $700 billion for gains that lack real economic substance.

Critics argue that loss of tax revenue from indexing would be too steep. However, if these gains should not have been taxed to begin with, such a loss could be viewed as a necessary correction. The potential benefits of eliminating the tax on inflationary gains could stimulate broader economic activity, ultimately leading to greater asset valuations.

Consider the possibility that millions of American investors might prefer a robust Dow Jones average of 50,000 with indexing over a lower average of 44,500 without. As investors realize true capital gains, the government may even benefit from increased tax revenues over time.

The legal authority for Trump to issue an executive order on this matter is a topic of debate, hinging on the interpretation of cost within the Internal Revenue Code. However, insights from a significant 2012 paper in the Harvard Journal of Law & Public Policy indicates that Treasury may indeed have regulatory authority to enact indexing for inflation. With this legal backing, Trump could be poised to make substantial economic changes.

This article was originally published by the Daily Caller News Foundation.

James Carter is a contributor to The Daily Caller News Foundation and previously served as a principal with Navigators Global. He led the tax team during President Donald Trump’s transition and held a role as deputy assistant secretary of the Treasury under President George W. Bush.