Trump shouldn't wait on Congress to index capital gains

Trump shouldn't wait on Congress to index capital gains
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President Trump has the opportunity to take the lead on one crucial, pro-growth tax cut. He can issue an executive order that instructs the IRS to index capital gains to inflation, which will substantially lower taxes on long-term investment.

The “Big Six,” which refers to Treasury Secretary Steven MnuchinSteven Terner MnuchinAnalysis: House GOP tax bill adds .3T to the deficit Mnuchin: Comparisons to James Bond villain a compliment Sunday shows preview: GOP gears up for Senate tax reform push MORE, National Economic Council Director Gary Cohn and top Republicans in the House and Senate, require a collaborative process — and rightfully so — to formulate significant reforms to our nation’s tax code. But the Trump administration does not have to wait on the Big Six to finish ironing out details in the halls of Congress. With an executive order indexing capital gains to inflation, Trump could take a significant step towards reducing taxes for millions of Americans all with a single stroke of his pen.

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Under our current tax code, taxpayers are paying “phantom” gains in the form of taxes from capital gains earnings that literally do not exist. To understand the full absurdity of this, first it is necessary to understand how the system currently works. For example, if someone saving for retirement purchased an S&P index fund for $1,000 in 1997 and dutifully held it for 20 years, they could now sell it for $2,665. That’s a gain of $1,665. Unfortunately, the full amount would be subject to taxation. But $538 of that $1,665 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.

 

Not only will the proposal to index capital gains to inflation introduce an element of fairness, it makes sense. It’s illogical for taxpayers to pay taxes on nonexistent income. Furthermore, this proposal is not a radical one. In fact, over 30 years ago, income tax brackets were indexed to inflation.

Best of all, millions of Americans would see a positive and immediate effect on our nation’s economy and more importantly, their pocketbooks. With fewer taxes to pay, people will have the opportunity to put their money to good use in the economy rather than their earnings unjustly ending up in government coffers. Individuals could use this money to reinvest in the economy, allowing businesses to expand, innovate, and create more jobs. It would further encourage people to expand their savings and incentivize those who are not currently doing so to start saving.

Additionally, 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.

The Trump administration could also propose the plan of indexing capital gains to inflation as a “down payment” to spur Congress to act on the broader tax reform discussion. In an effort to help get the ball rolling, nearly 30 leading conservative groups recently sent a letter to President Trump and Treasury Secretary Steven Mnuchin making the case for the need to index capital gains to inflation.

Achieving this policy victory does not require waiting on Congress to act, which is a good thing since Congress seems incapable of producing anything these days. The Trump administration has fortunately shown a singular focus and determination to create jobs and relieve the tax burdens imposed on American taxpayers. Indexing capital gains to inflation would get our nation closer to this goal.

Few things in Washington are as easy to accomplish as this proposal is. And few things in Washington can unleash such significant economic growth and job creation as immediately as this proposal could. All it will take is an executive order with President Trump’s signature.

Former Rep. David M. McIntosh is president of the Club for Growth, a nonprofit group aimed at reducing government and promoting fiscal responsibility.