A Second Hand Conjecture

Richard Rahn pushes for the indexing of capital gains due to inflation as part of the stimulus.

Accounting for inflation in this way has the advantages of producing more short-term revenue to the Treasury as long-term gains are “unlocked.” Furthermore, lowering the cost of capital would stimulate investment and the stock markets, and would increase the fairness of the tax system by not taxing phantom gains for people at all income levels. It would also square capital-gains taxation with the U.S. Constitution.

Assume you purchased a common stock in a company in 1984 for $100 a share and sold it in 2007 for $200 a share. Have you received any “income” from the sale of the shares of stock? The IRS would say “yes,” but this is clearly wrong. The IRS will claim that you had a $100 per share capital gain on the stock in the above example, yet actually the increase was solely a result of inflation. Because you cannot buy more goods and services with $200 now than you could have with $100 in 1984, you have had no “income” or wealth accretion.

Over the years numerous economists, lawyers and others have tried to fix this problem and have gotten nowhere with Congress. But now, due to increased concerns about inflation, economic growth and judicial salaries, the time may be right to move forward.

Pejman has his back.

Tags: capital gains, Economics, fiscal stimulus, inflation, IRS, taxes

Trackback URI | Comments RSS