Indexing Capital Gains to Inflation: A Matter of Fairness

Mason Thibault  |   July 31, 2018

The Club for Growth applauds Secretary of the Treasury Mnuchin for his recent statements regarding the indexing of capital gains to inflation. There is a current gross  injustice  that is currently included in the computation of capital gains. As an example, if someone saving for retirement purchased an S&P index fund for $1000 in 1998 and dutifully held it for 20 years, they could now sell it for $2513. That’s a gain of $1513. Unfortunately, the full amount would be subject to taxation. But $570 of that $1513 isn’t a real gain at all.  It’s phantom income that was eaten away because of inflation.  And yet, taxpayers are currently forced to pay taxes on this nonexistent income.

For much the same reason that income tax brackets were indexed to inflation over 30 years ago, Club for Growth  believes that it is only a matter of fairness to do the same for capital gains. By taking action to index capital gains to inflation, the real after-tax rate of return on all equities would immediately be priced higher – thereby increasing the wealth held by the millions of working and retired Americans who own 401ks, IRAs, mutual funds, and brokerage accounts.  It would further encourage people to expand their savings, and incentivize  workers new to the marketplace to start doing so.  By preventing the money from unjustly going to the government, it could be re-invested in the economy, allowing businesses to expand, innovate, and create more jobs.

As an organization that is unequivocally committed to Pro-Growth policy that will improve economic growth, indexing capital gains to inflation can help serve as a “down payment” that will help ignite the broader conversation about tax reform.