Here's what's at Stake

Issue Summary

“Forcing individuals, families, and businesses to pay taxes on inflation runs counter to every notion of basic equity that ought to be the guiding principle of the American tax system. The solution is as simple as the problem: index the basis of the capital gains tax to offset that part of the price increase caused purely by inflation.”

Bill Armstrong

Senator Bill Armstrong
1982

Americans pay long-term capital gains tax on assets held longer than 1 year. That includes their personal homes, buildings, land, stocks and bonds, cars and trucks, commodities, jewelry, artwork, or any other property.

When capital assets are sold, the difference between the original purchase price and the sale price is the capital gain. Americans earning less than $492,300 pay 15% capital gains tax. Taxpayers earning more than that pay 20%.

That income threshold is indexed to inflation, but the original purchase price (the “basis”) is not indexed. No matter how long the asset has been held, the original basis never changes.

Inflation raises the cost of property, often dramatically, the longer an asset is held, eating away the purchasing power of those dollars. Thus, much of the “gain” is artificial – the paper-only increase in property value – and does not accurately reflect the purchasing power of those dollars.

Primary residences are excluded from capital gains taxes, but only up to $250,000 for individuals ($500,000 for couples filing jointly) – yet millions of Americans have more equity than that in their homes, because of inflation. They will pay capital gains taxes when they sell their home.

Some capital gains are illusory, reflecting only inflation between the time the asset is bought and the time it is sold. As Steve Moore writes, “when inflation is high… the tax rate can even rise above 100 percent,” meaning the taxpayer pays taxes on a capital gain that does not represent any increase in real wealth.

That discourages saving, and especially investment. It also makes long-term planning difficult because the future of inflation is so uncertain.

Indexing would simply establish the basis in investments as the original cost paid, adjusted for inflation until the date sold. The rates would stay the same, but the tax would be paid on actual real-dollar gains, not paper gains caused by inflation.

Forcing individuals, families, and businesses to pay taxes on inflation is unfair. The solution is as simple as the problem: index the basis of the capital gains tax to offset that part of the price increase caused purely by inflation.

Already Indexed to Inflation

Personal and business tax brackets, standard deduction, alternative minimum tax, estate tax, gift tax, earned income tax credit, retirement plan contribution limits, contributions to health flexible spending plans, Medical Savings Account expenses, foreign earned income exclusion, and others.
 
One major tax still not indexed to inflation – capital gains.

Who We Are

Inflation Tax Relief is a joint project of the National Taxpayers Union and The Armstrong Project utilizing research from leading economists Art Laffer and Steve Moore and backed by Laffer Associates.
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National Taxpayers Union

NTU is the “Voice of America’s Taxpayers.” We work for a simple and fair tax system that enables prosperity for all and respects taxpayers’ civil rights, lean and efficient government services and regulations, sustainable fiscal policies to avoid national bankruptcy, and permanent limits on taxes, spending and debt.

Laffer

Laffer Associates

Laffer Associates is the culmination of a lifetime’s worth of rigorous institutional and academic economic research by the firm’s founder and chairman, Dr. Arthur B. Laffer. For more than 35 years, Dr. Laffer has dedicated his distinguished career in economics to developing original works and proprietary models that analyze and forecast how economics affects the real world.

Bill Armstrong-1

The Armstrong Project

The Armstrong Project is a series of new initiatives led by Wil Armstrong, to preserve the historical record of his father, Senator Bill Armstrong, and especially to build on his important work for faith, family, and freedom. Preserving history is important, especially in an era when so many Americans have forgotten our founding principles.

Join the Fight for Inflation Tax Relief