what does the Republican proposal to “index capital gains for inflation” mean?

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EDIT: as /u/dilletaunty points out, it’s the *purchase price* that is increased by the inflation rate, to ultimately reduce taxable gains.

In: Economics

I’ll start with an example. The company I work for increases employee pay yearly to compensate for inflation. It appears that my wage has increased but in a realistic sense I have not gained income. That “increase” is used to combat inflating prices of goods. So a company’s revenue may appear to have increased but inflation is the actually result. Accounting for inflation would result in a more accurate tax on businesses affected by inflation. This is my understanding of course and would like to see differing views.

The Bloomberg report on this (https://www.bloomberg.com/news/articles/2019-06-27/white-house-mulls-capital-gains-tax-break-that-benefits-wealthy ) talks as follows:

Indexing capital gains would slash tax bills for investors when selling assets such as stock or real estate by adjusting the original purchase price so no tax is paid on appreciation tied to inflation.

Most of the benefits would go to high-income households, with the top 1% receiving 86% of the benefit, according to estimates in 2018 by the Penn Wharton Budget Model. The policy could reduce tax revenue by $102 billion over a decade, the model found.

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So what I am getting from this is that the taxable value of capital would account for inflation*, reducing the total amount taxed. Say that I bought a penny stock 4 decades ago and it had moved up to a dollar stock solely due to inflation, having no intrinsic value because it was a shit buy. I would not need to pay any tax on the money I get from selling it.

As it is almost entirely the rich who own capital, they would benefit the most from this.

* Taxable value = Sale price – Purchase price. This would change purchase price by increasing it by the inflation rate of the years since its sale.

Money represents value. But money doesn’t represent the same value over time – money actually decreases in value. The same dollar/euro this year is worth less then the same dollar/euro a few years ago. While I am not sure why this is happening exactly (logical reason would be that more money is printed – if one bar of gold is worth 10 banknotes and you print 10 more, then 10 banknotes are subsequently only worth half a bar) the proposal is meant to make sure the difference between the value of past years and current years is corrected in legislation.

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Arby’s used to sell 5 roast beef sandwiches for $5 in the 90s. They now sell 2 roast beef sandwiches for $5.

When you buy 2 roast beef sandwiches, should you be taxed for 5 sandwiches because you could have bought 5 of them back in the 90s?

Similarly, if I bought a stock for $5 in the 90s that is worth $8 now and sell it, the current law would tax me for a $3 profit. I actually lost $0.40 because $5 in 1995 is worth $8.40 today. If we go back to 1990, it is worth almost $10 today. If we go back to 1970, it is worth $33 today.

So what if it isn’t one stock for $5, but 10,000?

33-5 = 28 * 10,000 = $280,000 that I could be taxed for… when I actually made no money.