Getting “Real” with Capital Gains Taxes by Adjusting for Inflation

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…

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