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1 Stephen J. Entin, Getting Real with Capital Gains Taxes by Adjusting for Inflation 1 (2018)

handle is hein.taxfoundation/gteacxin0001 and id is 1 raw text is: FISCAL FACT No. 577 Mar. 2018 The Tax Foundation is the nation's leading independent tax policy research organization. Since 1937, our research, analysis, and experts have informed smarter tax policy at the federal, state, and local levels. We are a 501(c)(3) nonprofit organization. @2018 Tax Foundation Distributed under Creative Commons CC-BY NC 4.0 Editor, Rachel Shuster Designer, Dan Carvajal Tax Foundation 1325 G Street, NW, Suite 950 Washington, DC 20005 Getting Real with Capital Gains Taxes by Adjusting for Inf lation Stephen J. Entin Senior Fellow Key Findings * Inflation-related gains on the sale of assets are not a real increase in wealth. Indexing the purchase price (tax basis) for inflation would provide savers some relief for this type of tax on fictitious income. * Failure to index the purchase price (tax basis) of assets increases the effective tax rate on saving and investment. Less capital is formed, depressing wages and employment. * Adverse effects of inflation on reported capital gains and the capital gains tax get worse the higher the inflation rate and the longer an asset is held. In the inflationary 1970s, many sales of stock that appeared to be gains were, in fact, real losses. * Inflation is low today, but that may not always be the case. Indexing provides important protection for all citizens, even those who have no capital gains, by reducing government's ability and incentive to raise effective tax rates by inflating the currency. * Indexing assets prices for determining capital gains is good policy, but it would not end all the anti-saving biases in the tax code. * Ordinary saving is inherently double-taxed, except for the portion of saving done in tax-deferred Individual Retirement Accounts (IRA) and pension arrangements, or in Roth IRAs and tax-exempt bonds, or certain education savings accounts. These arrangements should be expanded. * Ending the inflation bias would also require immediate expensing of capital outlays (on plant, equipment, structures, inventories, etc.), instead of depreciating them over time. Depreciation allowances are not adjusted for inflation, which can seriously depress real returns on investment and retard capital formation. 202.464.6200 taxfoundation.org

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