On Tuesday, a Treasury official told FOX Business the economic impact of indexing capital gains to inflation – or accounting for inflation when determining what is owed in taxes – was being evaluated by the administration.
Though Treasury Secretary Steven Mnuchin said his department would consider passing the tax using its regulatory powers if necessary, the official told FOX Business it was his preference that the measure be taken up by lawmakers.
Here are three ways this change could affect investors and the economy:
Save money
Capital gains taxes are paid on the difference between what an individual originally paid for a property or investment and what she sold it for. However, some experts argue that investors lose money under current law because inflation is not accounted for when making the liability calculations.
“Capital gains need special rules to ensure that savers do not get unfairly taxed on inflationary gains, which raises the effective tax rate and reduces investment,” Chris Edwards, director of tax policy studies at Cato and editor of www.DownsizingGovernment.orgOpens a New Window. , told FOX Business. “Governments can fix the problem by cutting the capital gains tax rate or indexing gains for inflation.”
The capital gains tax rate is about 20%, though Edwards said the top federal-state rate is about 28%.
Economic benefits
Indexing capital gains liabilities for inflation would chiefly benefit wealthier households, according to an analysis by the University of Pennsylvania’s Wharton School of BusinessOpens a New Window. . It would save individuals, largely concentrated on the higher-end of the income spectrum, about $102 billion over the course of the next decade.
Edwards argues that since cutting the effective tax rate will lead to more gains for investors, the government would ultimately end up losing little – if any – revenue over the long term.
He also notes that this cash could be injected back into the economy via investments in startups and growth companies.
“Low capital gains taxes are crucial to America’s continued growth in technology industries and global leadership in innovation,” Edwards said.
High U.S. rates
The capital gains tax rate remained largely untouched under the tax reform package signed into law in December. When compared with other developed economies, the U.S. has one of the highest ratesOpens a New Window. .
As Edwards pointed out, the rate is actually zero percent in places like the Netherlands and New Zealand.
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