Is Inflation Indexing of Capital Gains Good? Bloink & Byrnes Go Thumb to Thumb

Bloink: This is just another Trump ploy to provide tax breaks for the extremely wealthy.  Indexing capital gains for inflation would solely benefit the very wealthy and add a huge amount to the federal deficit. The actual capital gains tax brackets technically already have an inflation indexing component, because they are tied to the ordinary income of the taxpayer who sells the asset.

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Byrnes: But the fact is, taxpayers are still being taxed on appreciation in asset value that is solely based on inflation. To make the capital gains tax system more fair, we need to exempt that inflation-based appreciation from tax.

Bloink: Indexing the capital gains tax system for inflation alone would not be fair at all. It would create an incentive for wealthy taxpayers to create inefficient tax shelters because the proposals never mention indexing other tax items that are related to capital expenses, such as the interest expense deduction and depreciation system. Not placing corresponding adjustments on these rules gives a huge incentive for taxpayers to engage in tax shelter activities.

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Byrnes: But not indexing the capital gains system punishes taxpayers who are willing to make investments in our economy and take on the risk that that entails. Long-term investments are vital to our economy and are critical to the growth potential for small businesses that need investors in order to get on their feet in the first place.

Bloink:  The problem Professor Byrnes lays out is one that only the very rich have to face. The long-term capital gains tax rate is already significantly lower than the top ordinary income tax rates, meaning that wealthy taxpayers already have an incentive to shift funds into capital gains producing assets—in other words, to invest in our economy.

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Byrnes: When the economy is strong, it's good for everyone, not just the very rich. Investment is the fuel that keeps the economy going, and we need to take further steps to encourage that investment so that the already strong economy can continue along that path.

Bloink: The bottom line is that indexing the capital gains tax system is a benefit for the very wealthy, and would encourage inefficiencies as these wealthy taxpayers look for new opportunities to shelter funds from tax.

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