On Monday, Sen. Ted Cruz (R-Texas) and 20 other senators sent a letter to Treasury Secretary Steve Mnuchin asking him to change the way the federal government levies taxes on capital gains, indexing the tax to inflation. This change would be more just and it would unleash investment by incentivizing more Americans to buy stock in companies. In fact, this small tax adjustment is estimated to create an additional 21,800 full-time equivalent jobs.
‘The United States economy has experienced historic levels of growth as a result of Congress and the current Administration’s policies such as the Tax Cuts and Jobs Act. Implementing a policy of indexing capital gains to inflation will help to perpetuate these successes by encouraging savings, investment, and innovation so that everyday Americans can continue to enjoy better lives and livelihoods,” Sen. Cruz wrote in the letter.
According to the nonpartisan Tax Foundation, pegging the capital gains tax to inflation would add approximately $22 billion to the U.S. economy over the long run, boost after-tax incomes by 0.2 percent on average, and create an additional 21,800 full-time equivalent jobs.
The senator gave an example of how the current tax works and how indexing the capital gains tax to inflation would help taxpayers.
“This means, in some cases, a taxpayer can face a tax liability even after suffering an actual loss. Imagine, for example, a taxpayer who purchased one share of Coca-Cola stock in 1998 for $32.38. If they sold the stock earlier this year at $48.13, they would have a nominal gain of $15.76 and be taxed $3.75. The inflation-adjusted basis [the original stock purchased] in today’s dollars, however, would be $50.50. That means the taxpayer would have to pay $3.75 in taxes on a $2.38 loss. Even when a taxpayer experiences a real grain, the effective capital gains rate can easily double the statutory rate passed by Congress,” Cruz wrote.
In other words, the current method of taxing capital gains is unjust and discourages investment. Since inflation is occurring, the original stock price in real dollars is actually higher than it appears. The Treasury should take this into account when levying the capital gains tax.
Implementing this change would not alter the law, but only make the current capital gains tax more just in its implementation.
Democrats claim that this tax adjustment would help the rich, but every segment of investors would have their tax burden reduced in real terms. Furthermore, the benefits of economic growth would help everyone.
In the letter, Cruz was joined by 20 Senators: Kevin Cramer (R-N.D.), Jim Inhofe (R-Okla.), Marsha Blackburn (R-Tenn.), Thom Tillis (R-N.C.), Pat Toomey (R-Pa.), John Boozman (R-Ark.), James Lankford (R-Okla.), Steve Daines (R-Mont.), John Barrasso (R-Wyo.), John Kennedy (R-La.), Mike Braun (R-Ind.), Ron Johnson (R-Wis.), Cindy Hyde-Smith (R-Miss.), John Cornyn (R-Texas), Rand Paul (R-Ky.), Richard Burr (R-N.C.), Roy Blunt (R-Mo.), Roger Wicker (R-Miss.), Jim Risch (R-Idaho), and Ben Sasse (R-Neb.).
“All taxpayers appreciate Senator Cruz’s leadership in the fight to stop the government from taxing inflation. This has gone on too long. Taxing inflation is wrong and unfair,” Grover Norquist, president of Americans for Tax Reform, said in a statement. “The Trump administration has the power to correctly define gains as real gains and not inflation gains.”
Read the full letter here.
Follow Tyler O’Neil, the author of this article, on Twitter at @Tyler2ONeil.