Don’t Index Capital Gains. Fix Inflation.
After several years of above-target inflation, policymakers in Washington are weighing whether to index capital gains for inflation. As things currently stand, capital gains are not indexed to inflation, so when inflation rises, so does the real tax burden investors face. While there are reasons to address this distortion, one overlooked benefit of the current system is that it concentrates the costs of inflation on investors, giving them a powerful reason to demand price stability. Indexation, therefore, may reduce investors’ reason to lobby for lower inflation in the first place, and may, inadvertently, lead to higher inflation.