Trump Team Mulls Inflation-Indexing Capital Gains to Lower Tax Bills

Congressional Republicans are working overtime to deliver major legislative gains during President-elect Donald Trump’s first 100 days in office, including a major tax bill that may index capital gains to inflation, Gover Norquist, a conservative tax pundit and informal Trump economic advisor told reporters.The inflation indexing would reduce the amount of gain that is taxable when an investor sells assets.

“Advisors to him have been talking about it, people around him have been advocating for it,” Norquist told the Washington Post. “There’s a whole industry of people saying, ‘This is constitutional and you should do it.

’”Today, long-term capital gains on investments are taxed at the taxpayer’s income tax rate. However, the proposal the Trump camp is studying would use inflation to adjust upward the cost basis on an asset that a taxpayer sold.

While Trump ran on the promise of extending the individual tax cuts from 2017, which lowered taxes for taxpayers in every income bracket paid, he also vowed during his campaign to make tips, overtime pay and Social Security benefits tax free, while also pledging to reduce the corporate tax rate from 21% to 15%.

While GOP leadership and House Speaker Mike Johnson have been working on legislation for months to ensure they can deliver a jumpstart to Trump’s agenda, Trump could also choose to side step Congress process entirely and reduce taxes on capital gains without congressional approval, using an executive order.

The proposal to index-inflation for long-term capital gains was first floated in 2018 when there was a push to create $100 billion tax cut by executive order. That effort failed because of a thumbs-down from former Treasury Secretary Steve Mnuchin, the Washington Post reported.

Given the Biden Administration’s historic inflation, Trump advisors told reporters that indexing capital gains to inflation is now even more palatable.

“Conceptually, it makes sense to adjust tax items like capital gains for inflation to ensure taxpayers are not taxed due to increases in the price level over time. However, there are tradeoffs,” said Tax Foundation Senior Policy Analyst Garrett Watson, who studied the measure when the Trump administration floated it in 2018.

“One tradeoff is indexing capital gains for inflation can be complicated, as indexing gains without indexing other types of capital income and expenses can create avoidance strategies for taxpayers,” Watson said.

Indexing capital gains alone would also not protect other types of capital income from inflation, some of which are more exposed to inflation’s effects, the tax analyst said. That’s because the impact of inflation goes down the longer a taxpayer defers realizing a capital gain, but this is not true of capital income subject to tax each year, such as a bond with a set interest payment each year.

“These issues could be resolved by more broadly indexing the tax code (including depreciation deductions and debt), but it’s not clear if that would be a realistic policy option headed into 2025,” Watson said.

“Indexing capital gains taxes to inflation would be great for stock holders, but would be tough to track, and would you then index interest to inflation?” New Berlin, Wisc.-based Thrivent advisor Jeremy Keil asked. “Personally, I think tax policy shouldn't be picking winners and losers, in this case pitting investors vs. savers.”

There is also the matter of cost. Back in 2018, the Tax Foundation estimated what the revenue and economic impacts of indexing capital gains to inflation would reduce revenue by about $178 billion over 10 years and increase the long-run size of the economy by 0.1%, but the revenue effects may be higher now, Watson noted.

Overall, Trump’s tax measures is estimated to add $9.7 trillion to the national debt over 10 years, according to the nonpartisan Committee for a Responsible Federal Budget.

With or without inflation-indexing, however, investors and advisors should expect to see a large tax bill early in 2025, Norquist said. “They’re going to do this one very early,” the conservative tax advocate told the Washington Post.