End the Inflation Tax on Capital Gains

President

Ronald Reagan’s

1981 tax cut was the first step in this campaign. The legislation effectively ended the tax that inflation wrought on wages by indexing federal income-tax brackets. When the legislation was put up for a final vote, it garnered strong bipartisan support: It passed by a margin of 282-95 in the Democrat-controlled House and 67-8 in the Republican-controlled Senate. Then-Sen.

Joe Biden

voted “yes.”

Several other provisions of the tax code, from the standard deduction to the earned-income tax credit, are indexed to inflation. Absent from that list, however, are capital gains. Today’s inflation promises to make the effective tax inflicted on them more painful than ever.

Consider how inflation drives up the tax paid on capital gains. Say you bought an asset for $100,000 in 2000. In 2022 dollars, that same amount is now approximately $171,000, a cumulative inflation rate of 71%. If you want to sell the asset today at that amount, the Internal Revenue Service says you have a “gain” of $71,000, when in fact you had no real gain at all. If you are in the 15% long-term capital-gains tax bracket—i.e., single filers with an income of $41,676 to $459,750—you have to pay $10,650 in capital-gains taxes to the IRS.

That tax isn’t limited to “the rich.” IRS data for tax year 2019 shows that 25.7 million American households had a capital-gains filing: 13 million of these households (51%) made less than $100,000, and 20 million (78%) made less than $200,000. An April Gallup survey, moreover, reports that 58% of households own stock.

The good news is that the efforts to index this tax have enjoyed bipartisan support before, including among many policy makers in office today. Congress came close to solving the problem on three occasions.

In 1978, Rep.

Bill Archer

(R., Texas) introduced an amendment to index capital gains to inflation. Mr. Archer’s amendment passed the House Ways and Means committee on a bipartisan 21-16 vote and became part of the 1978 tax bill, which saw stunning bipartisan success, passing a House led by Democrat

Tip O’Neill.

In the end, however, the House-Senate conference cut the indexing provision from the final bill. Though President

Jimmy Carter

signed the bill into law, which reduced the effective capital-gains tax rate, it didn’t address the more-pressing inflationary concern.

Four years later, Sen.

Bill Armstrong

(R., Colo.) picked up the mantle again. His amendment to index capital gains passed the Republican-controlled Senate 64-32, with bipartisan support (but over the objection of Mr. Biden). Again, as the bill made its way through House-Senate conference, capital-gains indexation didn’t survive.

Finally in 1992, Rep.

Dan Rostenkowski

(D., Ill.), chairman of the Ways and Means Committee, sponsored an amendment that included capital-gains indexation. The amendment passed the full House with the support of Reps.

Steny Hoyer

(D., Md.) and

Chuck Schumer

(D., N.Y.), now House and Senate majority leaders, respectively. “Indexing all capital gains,” Mr. Schumer said on the House floor, “would shift the balance in this country away from too much consumption, too much borrowing and towards more savings and investment over the long run.” Yet again the indexing provision died in conference.

Ending the inflation tax on capital gains is, first and foremost, sound economics. The tax cut would drive more investment and growth, in addition to reducing the damage to the economy brought on by inflation.

But it’s also sound politics. Given the provision’s bipartisan heritage, indexing capital gains to inflation is a legislative compromise that President Biden might actually sign into law. Incumbent Democrats looking ahead to the 2024 elections may well choose to support it.

The legislation is already written. Sen.

Ted Cruz

(R., Texas) and Rep.

Warren Davidson

(R., Ohio) introduced the policy in November 2021 as the Capital Gains Inflation Relief Act.

Republican candidates nationwide should make the case for indexation now. It gives them the opportunity to highlight the president’s inflation blunders while also offering their own solutions of lower taxes and accelerated economic growth. As a bonus, they might just find that Democrats join them—as they have three times before.

Mr. Norquist is president of Americans for Tax Reform.