Earlier this week, the Trump administration proposed cutting taxes on capital gains as a follow-up to the tax laws passed last year. The current 20% tax rate on long term capital gains is applied to the difference between an asset’s value at the time of purchase versus when it is sold.
The purpose of the indexing of inflation for capital gains is intended to further more capital investment and increase wages, household net worth and returns to shareholders. Technically, it makes logical sense, however, there are some unanswered questions:
- How are you going to track the index for inflation, especially for stock with no financial market and real estate investments?
- What types of assets would be covered by indexing?
- Whether or not indexing can generate an investment loss or increase an investment loss
- Whether or not this inflation indexing should apply to past inflation or just future inflation
- Is this change in the tax law going to be revenue neutral or not
President Trump is also proposing to pass this proposition by circumventing congress, which is a source of contention among certain members of congress. According to Steven Mnuchin, Treasury Secretary, the Administration is studying the economic costs and the impact on growth this would have.