Don’t Back Off Indexing Capital Gains for Inflation

By at 22 August, 2019, 5:30 pm

Continuously improving the policy environment is essential to America’s business environment, and the health and growth of our economy.     

By Karen Kerrigan-

President Trump must not get sucked into the newest storyline, which seems to suggest that the policy ideas and reforms he is (or has been) considering are reactions to a slowing economy or the possibility of a recession.  The key reason for advancing pro-growth policies and reforms is for making the U.S. as investment and business-friendly as possible so that entrepreneurs and investors continue to take risks. This is essential for a vibrant and globally competitive economy.

Continuous improvement to outdated or bad policy is critical to that end.

It was disappointing to hear President Trump back off the idea of indexing capital gains taxes for inflation. Whether we are in a slowing economy, a booming economy or a recession, taxing inflation on capital gains taxes is just a bad idea.

President Trump backed off indexation a mere few hours after what seemed to be positive comments about the range of various tax measures he said his Administration was or has been considering.  Interestingly, he commented that indexing capital gains for inflation would be viewed as “somewhat elitist.”

Data from Americans for Tax Reform (ATR), however, makes it clear that indexing capital gains taxes is very much a middle-class issue. As noted in a blog post on the ATR website:

Indexing capital gains taxes to inflation would benefit millions of middle income households. 

ATR looked at Internal Revenue Service data from 2016 (the most recent available data) to determine what percentage of middle class households experienced a capital gain or loss. Nationally, over half (56 percent) of households that had a capital gain or loss make less than $100,000 a year. 82 percent of households made less than $200,000 a year. 

Indexing capital gains for inflation would have a powerful effect on our economy and for entrepreneurship.  Weak entrepreneurship continues to be a challenge in the U.S., and President Trump needs to look at every solution possible to boost new business creation, with capital access and capital formation being critical areas to address.  As I noted in my letter to Treasury Secretary Steve Mnuchin in support of indexing capital gains for inflation and using his authority to do so:

Taking the reasonable step of including an inflation adjustment in determining capital gains would boost incentives for entrepreneurship and investment, and unlock financial capital to be reallocated more efficiently. That would be good news for the creation and development of businesses, and for economic growth in the near term and over the long haul.

Improving policy is not a one-off exercise. Continuously improving the policy environment is essential to America’s business environment, and the health and growth of our economy. Please keep moving forward on all pro-growth policies Mr. President. Indexing capital gains for inflation is a small but very helpful step that would boost business creation and keep the economy humming. For the sake of entrepreneurship and capital formation, please look at its merits again.

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.   


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