Frequently Asked Questions

Who benefits from the current un-indexed system?

Government. It is ironic and just plain unfair for the government to create inflation (by spending and fiscal policy), then to make the taxpayers pay for it. Government actually profits from the inflation that hurts everyone else! Somewhere along the line, politicians decided they could make taxpayers pay the economic costs of inflation, while also increasing government revenue, and expanding the economy all at once. But in fact, the real result is to dry up capital, holding back economic growth. Just as people and businesses are trying to recover from a two-year shut-down, and just when they most need new capital investment that creates new jobs. But instead of relief, taxpayers are being punished – taxed on inflation, not on real gain.

Is there already legislation on this issue?

Yes. Various versions of legislation to index the basis in capital gains to the rate of inflation has been introduced almost every year for four decades. The current “Capital Gains Inflation Relief Act” is the latest version. A similar bill would index gains from some investments, called the Retirement Inflation Protection Act.

Is this is a new idea?

Not at all. It has been passed by both the Senate (twice) and the House at different times, though unfortunately not in the same year. Since the 1980s, there have been numerous legislative sponsors of indexing capital gains, beginning with the champion of tax indexing, Sen. Bill Armstrong (R-CO). Legislation has also been sponsored by Sens. Wayne Allard (R-CO), Rudy Boschwitz (R-MN), Dennis Deconcini (D-AZ), Robert Kasten (R-WI), Mike Lee (R-UT), Alan Simpson (R-WY), and Steve Symms (R-ID). House sponsors have included John Cooksey (R-LA), Phil Crane (R-IL), Warren Davidson (R-OH), Robert Dornan (R-CA), David Dreier (R-CA), Scott Garrett (R-NJ), Edgar Jenkins (D-GA), Jim Kolbe (R-AZ), James Moran (D-VA), John Myers (R-IN), Devin Nunes (R-CA), Mike Pence (R-IN), John Rhodes (R-AZ), Don Ritter (R-PA), and Nick Smith (R-MI). In both Houses there have been dozens of co-sponsors in both parties.

Does the issue require more time to study in today’s volatile economy?

The issue has been studied since the 1970s. Indexing enjoys widespread and bipartisan support in Congress, and has been endorsed by business groups such as the U.S. Chamber of Commerce and the Club for Growth, prominent tax policy advocates such as Americans for Tax Reform and the National Taxpayers Union, grass-roots organizations like FreedomWorks, many thoughtful journals of opinion, and leading economists such as Martin Feldstein, Larry Kudlow, and Stephen Moore.

Has Congress made corrections like this before?

Many times. Congress has indexed to the rate of inflation numerous provisions of the tax code: personal and business tax brackets, the standard deduction, alternative minimum tax, estate tax, gift tax, earned income tax credit, retirement plan contribution limits, transportation and parking fringe benefits, contributions to health flexible spending plans, Medical Savings Account deductibles and expenses, foreign earned income exclusion, deductible adoption expenses, and others.

Shouldn’t rich people with capital investments pay their fair share?

Reasonable people may disagree on what is fair, but it is an important objective. And no matter what amount you think is fair, it is unfair by any standard for any taxpayer to have to pay tax on something that isn’t real. It would be unfair to pay property tax on a house that doesn't exist. It is equally unfair to tax people on capital gains that are merely due to inflation. Indexing ensures that the tax is fair, based on real gains, not strictly paper gains.

Doesn’t capital gains relief primarily benefit the wealthy?

This is not capital gains “relief” as that term is normally understood (lowering the rates). The brackets would stay the same – this merely indexes the cost basis in investments, so the tax is paid on actual purchasing-power gains, not inflationary “ghost gains.” That makes the tax fairer for every investor, rich or poor.

Then who would really benefit?

Indexing capital gains would eliminate an unfair situation for millions of ordinary American families. Indirect investment, such as through mutual funds and retirement plans, has increased so that today more Americans are invested in the stock market than any time in history. Data from the Federal Reserve’s Survey of Consumer Finances shows that 55% of all US families owned publicly traded stock in some form in 2020 (Gallup says 58% of American adults in 2022, or 145 million people).

Don’t the wealthy own most stocks?

It is true that much of the total value of the stock market is owned by wealthy Americans (70% of value is owned by the top 10% of wage earners). Obviously, the percentage owning stock is higher among wealthier people (84% among those earning over $100,000), and lower among the poor (22% among those earning less than $40,000). But that does not tell the story of why this issue matters to the Middle Class. Over 65% of those working Americans (earning $40,000-90,000) own stocks. The median stock value held by American households is only $40,000.

Is all that stock subject to capital gains taxes?

Not necessarily. Most stocks owned by the middle class are indirect investments (especially retirement accounts), where retirees making withdrawals pay regular income taxes, not capital gains taxes. However, between 15-20% of U.S. families – almost 13 million families – directly own stocks (not through retirement funds or mutual funds). And the Middle Class owns roughly 17% of the total stock market value – over $8 trillion. So, while the percentage may be smaller, it is a larger portion of their life savings for Middle Class families.

Are more stocks owned by the elderly?

Yes. Families with a head of household aged 45 to 54 may have the highest rate of stock ownership (58% in 2019). But the value of stock owned is much higher for older Americans, who are therefore more vulnerable to capital gains taxes if they sell those stocks. Families with a head of household 65 or older held 43% of the total dollar value of all stock in 2019, with a median investment of $109,000 for stockholders 65 to 74 and $84,000 for those older. Across all demographics, stock holdings make up 28% of the combined assets of people 75 and older. And
no matter much those stocks may have increased in value, millions are forced to hold onto them and leave them to the next generation, because of unindexed capital gains taxes.

How about homeowners – aren’t they exempt from capital gains on the sale of their home?

Not at all. Congress granted an exclusion from capital gains taxes on sale of the primary residence, but only for the first $250,000 of capital gain ($500,000 for couples filing jointly). However, especially in today’s volatile housing market, millions of homeowners find themselves with more equity than $250,000 and may not be able to sell their home because of the unindexed tax. That affects more people than you might expect, as nearly 66% of all Americans own their home, their largest asset that is subject to capital gains taxes if they sell. Many simply cannot afford to sell their home and buy another, because of that tax – most of which is figured on inflationary gains, not real increases in purchasing power. That especially hurts the elderly, whose home equity is often much higher than average because they have owned their homes longer.

Aren’t the economic impacts of indexing capital gains unproven?

On the contrary, there is plenty of precedent for indexing, and we know its positive impacts. Other taxes, especially personal income taxes, have been indexed to the rate of inflation since 1981 – saving American families untold billions by not allowing inflation to force them into higher tax brackets. During the rampant inflation of the 1970s, Americans were often forced into higher brackets or slapped with a bigger tax bill just because their salaries included cost-of-living adjustments tied to inflation. Congress corrected that unfair system, called “bracket creep,” in which inflation became the cruelest tax of all (taxing gains that were not real). Today we face the highest inflation rate since then – resulting in the same appalling unfairness – and Congress should similarly index capital gains and other taxes.

How would indexing help the overall economy?

Beyond the issue of fairness to taxpayers, perhaps the most important reason to have an indexed tax system for capital investments is to allow our society to make long-term plans, and to invest in the future. Today, billions in investment capital are locked away, tied up and unavailable for important investments because of the unjustifiable taxes. Government is not getting the revenue it would get if that capital were being invested in new projects; new ventures, discoveries, inventions, and developments are stymied because of the shortage of capital; and new capital investment is faced with an uncertain future tax rate, because of the uncertainty about inflation. Investment ought to be based on an analysis of the potential for success, not held back because of the fear of future inflation.

How does the lack of indexing affect government revenues?

As economist Steve Moore points out, “No one knows for sure how much unrealized capital gains would be sold if indexing were adopted as federal tax policy. In the short term, this could mean hundreds of billions of dollars of sales of stock, and then tens of billions of dollars of tax revenues collected by the government.” The problem is, without indexing, shareholders often hold on to stock until death and pass it on to their heirs, free of capital gains taxes. Some is also put into charitable foundations, where capital gains taxes are never paid. Thus, the government never collects much of the revenue it would get if such stocks and other investments were sold.

Why now?

For the past three decades the inflation tax on capital gains has not been a big issue because inflation has been so low. But as of 2024, real household income has fallen nearly 6% in two years, gas prices are nearing $5 a gallon, housing affordability is at its lowest level in 30 years, interest rates are spiking, and inflation is eating away Americans’ purchasing power. A less talked-about impact of inflation is that the tax on capital investments, such as stocks or real estate, is skyrocketing – without the corresponding increases in actual real-dollar gains. Moore explains that “even though the stock market and company earnings were up last year in nominal terms, when accounting for inflation, most stocks lost money.” Yet capital gains taxes were due, nevertheless. The high rate of inflation today makes indexing more important now than ever before. It is one way Congress can grant almost immediate relief to Americans suffering from extraordinary inflation.

Who We Are

Inflation Tax Relief is a joint project of the National Taxpayers Union and The Armstrong Project utilizing research from leading economists Art Laffer and Steve Moore and backed by Laffer Associates.

National Taxpayers Union

NTU is the “Voice of America’s Taxpayers.” We work for a simple and fair tax system that enables prosperity for all and respects taxpayers’ civil rights, lean and efficient government services and regulations, sustainable fiscal policies to avoid national bankruptcy, and permanent limits on taxes, spending and debt.

Laffer Associates

Laffer Associates is the culmination of a lifetime’s worth of rigorous institutional and academic economic research by the firm’s founder and chairman, Dr. Arthur B. Laffer. For more than 35 years, Dr. Laffer has dedicated his distinguished career in economics to developing original works and proprietary models that analyze and forecast how economics affects the real world.

The Armstrong Project

The Armstrong Project is a series of new initiatives led by Wil Armstrong, to preserve the historical record of his father, Senator Bill Armstrong, and especially to build on his important work for faith, family, and freedom. Preserving history is important, especially in an era when so many Americans have forgotten our founding principles.