The Problem with Indexing Capital Gains to Inflation

The Problem with Indexing Capital Gains to Inflation

Jonathan Ernst

Douglas Holtz-Eakin, the president of the conservative American Action Forum and former director of the Congressional Budget Office, raises a number of questions about the latest tax-cutting idea being explored by the Trump administration: indexing capital gains to inflation.

Noting that such indexing would often be extremely complicated due a whole host of messy real-world details, ranging from dividend reinvestments to valuing options contracts, Holtz-Eakin writes:

"In an era of big data and advanced algorithms, one may be able to get the right answer. But no human being could likely fill out their taxes. And nobody could really be sure that they were being done correctly. This would undermine faith in the tax system and weaken an important pillar of a system of voluntary tax compliance. Is it really worth it?"

His bottom line: “Indexing capital gains for inflation is a hard policy problem. It has obvious appeal and correctness that guarantees it will be a perennial proposal. But it carries sufficient administrative and other baggage that it seems unlikely to get over the finish line.”