Trump’s Opportunity to Adjust Capital Gains Tax
President Trump could enhance his significant tax legislation by swiftly addressing the capital gains tax in relation to inflation.
There’s a realistic possibility he may navigate this without Congressional approval. Sources indicate that there’s interest within the administration for him to pursue this.
Taxing profits inflated by rising prices seems fundamentally unfair.
Take, for example, a middle-class investor who acquired stock at $10,000 when President Biden took office, only to sell it four years later for $12,200. She’ll owe around $400 in taxes on a perceived $2,200 profit, but due to an average 22% price increase during that time—often labeled as “Bidenflation”—she truly hasn’t gained anything.
The tax rate, at 23.8% (20% plus an investment tax added by Obama), applies to the sale of stocks, businesses, or real estate. In the past, during inflation spikes like those in the 1970s, tax liabilities often exceeded 100%, requiring investors to pay taxes even on losses.
The current president, recalling discussions dating back to George HW Bush about an executive order targeting this inflation-related tax, faced legal uncertainties back then.
However, Trump has a history of boldly approaching issues that others might avoid. When standard advice falters, he often thinks, “Why not?”
He could instruct the Treasury to redefine “capital gains” as the increase in an asset’s value after adjusting for inflation between the purchase and sale dates. This adjustment could lower the effective tax rate on capital gains, encouraging investment, which in turn may boost tax revenues.
Decades of data suggest that reducing capital gains taxes can enhance government revenue. The existing laws often compel investors to hold assets to evade taxes, creating what’s called a “lock-in effect.” They hesitate to sell not due to expecting higher returns, but to avoid tax implications.
Adjusting capital gains taxation for inflation would stimulate the sale of older assets, infusing fresh capital into promising, growth-oriented businesses.
While easy on the economy, indexing capital gains taxes is also politically advantageous. Wealthy seniors, constrained by fixed incomes, would be more inclined to sell appreciating assets if inflation taxes weren’t so daunting.
Long-time farmers, too, could see retirement dreams fulfilled at significantly lower tax rates after decades of investment.
Despite outcries from media and detractors labeling this as “tax cuts for the rich,” IRS data shows that a significant proportion of those reporting capital gains have incomes under $200,000—not exactly wealthy.
Outside of Washington, if Trump were to issue an executive order regarding capital gains indexing, he might find himself celebrated as a hero. How could Democrats defend against perceived punitive taxes?
While the outcome in court isn’t guaranteed, a legal challenge could nonetheless serve as a political win for Trump. The message is clear: he should take action.
