Congress can immediately combat the effects of inflation. Here’s how
Wil Armstrong
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Voters returned control of the House of Representatives to Republicans because they wanted change, not drama. They are suffering the worst inflation in 40 years, and the new leadership has a brief window of opportunity, perhaps only this one chance, to provide genuine relief on the most important problem facing America. That relief should begin with addressing inflation as the first item of business for the new Congress.
Step one is protecting consumers from taxes on phantom capital gains attributable to inflation. This policy, known as “indexing” the cost-basis for capital gains, makes political and economic sense and is the perfect bipartisan solution in this new era of divided government. Government should not profit from the inflation it created.
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There is ample precedent for this simple solution. In the 1970s, “bracket creep” threw people into higher tax brackets just because of inflation. Under the leadership of my father, Sen. Bill Armstrong (R-CO), Congress indexed personal income taxes to inflation in 1985, saving taxpayers $9 billion that first year and hundreds of billions since. Congress has since indexed many other parts of the tax code — but not capital gains, which would provide badly needed relief against this current wave of inflation.
Indexing capital gains has always had significant political support. It has previously passed both chambers of Congress. The idea enjoys widespread support among economists, small businesses, homeowners, investors, and large manufacturers alike. With one stroke, Congress could create a fairer tax system and unburden people from the added expense of inflation while stimulating investment, employment, and real wages.
Because capital gains laws do not adjust for inflation, gains are overstated, creating tax liability on appreciation that exists only on paper. The easy way to remove the effect of inflation on taxpayers’ capital gains is to allow them to adjust their cost basis, or the original purchase price of assets they sell, by the amount of inflation that has occurred since they bought the assets. Whether it’s their homes, farms, business buildings, stocks, or other investments, indexing the basis is simple and fair. They would pay the tax only on real gains.
Opponents sometimes argue that this reform would primarily benefit the wealthy. But a majority of people own stocks and two-thirds own homes, so the unfair tax on paper-only profits affects millions. Consider the hypothetical plight of an elderly lady who bought a house in 1975 for $40,900, the average home price in the United States that year. If she sells it now for the 2022 national average price of $507,800, she’ll have a nominal (unindexed) gain of $466,900. Even with the $250,000 exclusion on the sale of primary residences, she’ll owe taxes on $216,900 of her gain.
At the 15% capital gains rate for middle-class taxpayers, she’ll pay the IRS $32,535. However, if that 1975 price were adjusted for inflation, her basis in the house would be $184,283, not $40,900. Her capital gains tax would be $11,028, a third of what she’ll pay under the present system. Taxing that artificial “gain” is unfair to millions of homeowners.
Right now, capital investment faces an uncertain future tax rate because we face uncertainty about inflation. With indexing, the future tax rate would remain fixed. That certainty would enable long-term planning and result in more investment in the country’s future.
Indexing capital gains taxes would immediately provide relief against inflation for millions of homeowners and businesses. Congress ought to do it now.
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Wil Armstrong is an entrepreneur and investor in Denver, the chairman of the board of Colorado Christian University, and the son of the late Sen. Bill Armstrong (R-CO, 1979-1991).