Time to stop taxing inflation

When people think about investing, they often think about the stock market. Actively investing in Wall Street can be daunting but others who are able to tolerate the risk can and do invest in individual companies. Many of our parents and grandparents bought stock in Blue Chip companies like Ford and General Motors, AT&T and IBM, and held their shares for decades, resulting in a nice little nest egg. 

Some Americans currently approaching retirement bought stock in Apple, Amazon and Microsoft back in the early 2000s and have accumulated a tidy sum, while others bought mutual funds decades ago with the hope that appreciation and compound interest would make their retirement more secure.

{mosads}The problem is that government makes our senior years less secure by taxing inflation, and House Republicans want to stop it. The term of art for this is indexing capital gains for inflation, which is actually simpler than it sounds. The non-partisan Tax Foundation explains it rather well:

“Say an investor put $5,000 in the stock market in the year 2000. Under the current law, if that $5,000 generously turned into $8,000 over those 18 years, they would be taxed on the $3,000 gain, resulting in a tax liability of $450. The problem is, in 2018, that $5,000 from 2000 is equivalent to roughly $7,100 today. Inflation accounted for $2,100 of that gain. This means the investor only really made $900, not $3,000.”

Assuming a 15 percent capital gains tax, that’s a difference of $315 in taxes between the actual profit and the “paper profit,” which is mostly inflation. Extrapolate this difference over a lifetime of saving and we’re talking about real money in your pocket. Apply this to an entire nation of savers and the financial impact is extraordinary.

This flow of money would create some 400,000 new jobs by 2025 and boost Gross Domestic Product by about half a trillion dollars, according to Gary Robbins, a former Treasury Department economist. By his estimate, indexing capital gains for inflation in 2017 would have pumped $1.1 trillion of capital into our economy through 2025.

Indexing capital gains for inflation is the next step in turbo-charging the American economy. President Trump and Congress have already brought significant tax relief to individuals and corporations. If Congress can now make the Trump tax cuts permanent and enact indexing capital gains for inflation, the economic growth would eclipse anything we’ve seen in decades. 

The idea of indexing capital gains for inflation is neither new nor partisan. On Feb. 27, 1992, 220 House Democrats voted in favor of indexing capital gains for inflation, as part of the Tax Fairness and Economic Growth Act of 1992. There’s been a lot of churn on Capitol Hill over the past 26 years but some of those House Democrats from 1992 are still in Congress. Among those voting to stop taxing inflation were then-Rep. and now Senate Democrat Leader Charles Schumer (D-N.Y.); Rep. Steny Hoyer (D-Md.), who currently serves as House Democrat whip; and Rep. David Price (D-N.C.). 

A nod from any of these influential Democrats would put a bill to index capital gains for inflation on the fast track to passage and shift the economy into a higher gear. To the regret of everyone who wants to see the economy soar, it is unlikely that Schumer, Hoyer or Price will today back the measure they so fervently supported in 1992.

Indexing capital gains is not a sop to the 1 percent as progressive agitators would have us believe. Millionaires and billionaires who make money actively trading in and out of stocks would see little, if any, benefit from indexing for inflation because they don’t hold their investments long enough for inflation to be much of a factor. 

It would, on the other hand, provide an enormous boost to millions of seniors and those approaching retirement who have saved for decades. People with 401(k) plans, federal employees enrolled in the Thrift Savings Plan, teachers with 403(b) retirement accounts, and police and firefighters whose pensions are invested in the market would be the beneficiaries of indexing capital gains for inflation.

Americans are happy with the health of the economy over the past year. Taxes are down, wages are up, jobs are more plentiful and people are seeing their retirement accounts grow. Now, the president and Congress need to get rid of the tax on inflation to make sure people are allowed to keep more of their money in retirement. 

James Martin is chairman and founder of the 60 Plus Association. Saulius “Saul “ Anuzis is president of the 60 Plus Association.