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It increasingly looks as though there will be a second reconciliation bill, and House Ways and Means Chair Jason Smith (R–MO) says he wants tax provisions in it if it occurs. That’s fine, but there’s one tax cut idea floating around that he should exclude: indexing capital gains for inflation.
Capital gains indexation is popular among supply-siders. They argue that doing that would help unlock capital frozen in assets that owners won’t sell because of the taxes they would incur. Doing that, they contend, would recycle that money into productive investments, helping the economy grow.
Let’s stipulate that this might happen, although one can wonder whether enough assets would be sold to make a dent in a $31 trillion economy. The political downside to including this provision far outweighs any possible short- or medium-term economic gain.
Democrats already are making the traditional argument that Republicans only cut taxes for the rich. This is a canard, as the One Big Beautiful Bill Act and Trump’s 2017 tax cuts did help most individual taxpayers, too. But this provision would be particularly damaging because virtually the only people who could take meaningful advantage of it are the already rich and large corporations.
That’s because indexing for inflation only helps people who have held assets for a considerable period of time. Capital gains are the difference between the amount you bought the asset for and the price you sold it for. Indexation increases the amount you bought the asset for, known as “the basis,” by the amount of inflation over the time period you owned it. If you buy a share of stock in 2024 and want to sell it in 2026, you only have two years’ worth of inflation to adjust the basis for.
Now imagine you built a big mixed-use office and residential tower that opened in 1983 and have owned it ever since. You would have 43 years’ worth of inflation to adjust the initial basis — in this case, the construction and land acquisition costs, plus any improvements — to apply upon sale. That’s a massive amount. The government’s CPI inflation Calculator finds that $1 million in January 1983 is equivalent to over $3.3 million today, more than triple the nominal amount.
I didn’t choose this tower at random: it’s the Trump Tower in Midtown Manhattan. Index capital gains for inflation and President Donald Trump’s corporation would get a massive, multimillion-dollar tax break just for his signature building. Multiply that across all of his holdings and he would stand to gain an incredible amount of money if he sold his property.
Trump already sports low job approval ratings. I doubt Republicans being dragged down by this want to be on the receiving end of ads claiming truthfully that their new, pre-election tax bill passed right before an election they are slated to lose would hand him a massive windfall.
Democrats, of course, wouldn’t focus on Trump Tower alone. Trump purchased Mar-a-Lago for $10 million in 1985. The CPI Calculator tells us that this is nearly $31 million in today’s dollars. Assuming that the luxury club is held by a C-corporation, which pays a 21% capital gains tax rate, Trump’s corporation would get over $4 million in hypothetical tax breaks just for his most famous property. No GOP member wants to be blamed for voting for this in an ad with pictures of the club’s lush interiors and famous clientele.
Then there’s the issue of luxury goods, such as famous paintings. Paintings, historic cars, and other playthings of the ultra-rich are considered capital assets for purposes of tax law. That means indexation applies to them too, giving billionaires who buy famous paintings a huge tax break. Kenneth Griffin, for example, purchased two modern artworks for an estimated $500 million in September 2015. That would be equal to over $686 million under indexation, giving the billionaire investor tens of millions of dollars in tax breaks just for holding on to two famous paintings.
Do GOP House members in swing seats want to try to defend that?
It’s true that indexation would apply to everyone, so theoretically, any person who owns stock or a house would get the same break. But people can already exempt from taxation on the first $500,000 of capital gains on the sale of their principal residence. Indexation of houses only helps people whose gains would otherwise be over half a million dollars. There aren’t many ordinary taxpayers who fit into that category.
The best political case for indexation comes from the example of individually owned stocks or family businesses. Indexing stock purchases would reduce the amount retirees would pay when they sell investments from their 401(k) plans. It would also reduce tax bills when someone wants to sell the family business with large capital assets, such as farms. If that’s what the GOP wants to do, though, it can do that by only indexing those classes of assets.
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That approach, however, defeats the purpose of the idea for many advocates. Supply siders tend to dislike such targeted tax breaks because they narrow the tax base and create politically potent lobbying groups. It would also likely be opposed by large businesses, especially those with large underperforming properties they might want to sell. Advocates would note that it is precisely these types of property that likely make up the bulk of frozen, misallocated capital. Limit the tax break to politically favorable people and you also dramatically shrink the possible economic boost.
Indexation of capital gains for inflation may be a worthy idea when viewed in isolation. Viewing it in today’s political context, however, shows it can be a huge political loser. Republicans are already in a deep political hole as November’s midterm elections approach. They shouldn’t dig an even deeper one.
