Trump has floated a tax policy that both his supporters and detractors can embrace.

Inflation Index

The Trump administration is reportedly considering indexing capital gains to inflation—meaning that inflation would be incorporated in the calculation of capital gains tax to reduce the amount owed.

Here are some examples to help explain…

Suppose a taxpayer bought $100,000 worth of a stock and sold it years later for $150,000.

Currently, the entire $50,000 gain is subject to capital gains tax. Using a tax rate of 20%, the taxpayer would owe $10,000.

But that would change if the government indexed capital gains for inflation.

Assume the same set of facts, but suppose the government determined that prices had risen 40% in that time. In that scenario, $20,000 of the $50,000 gain could be due to inflation.

Under the potential plan, only $30,000 would be subject to capital gains taxes. Applying the same 20% rate as before, the taxpayer would owe $6,000 (a savings of 40%).

Sweet.

Legal Mechanism

The Internal Revenue Code (IRC) does index some figures for inflation, such as the income-bracket thresholds. This is required by the IRC in no uncertain terms. The IRC sections on capital gains don’t compel or prohibit inflation adjustments. Instead, they use the word “cost,” a term the IRC leaves undefined.

Trump could implement his plan by defining inflation as a “cost” in the Treasury regulations—the IRS’ official interpretation of the IRC.

This would be nothing new.

Today’s IRC is roughly 2,600 pages long (over four million words). The accompanying Treasury regulations are over 17,000 pages long (over 12 million words).

Intentional or otherwise, the Supreme Court encouraged this disparity. In Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (1984), the Court established the “Chevron” doctrine, compelling federal courts to defer to federal agencies’ reasonable interpretations of ambiguous statutes.

Both preemptively and in response to unfavorable rulings, the Treasury proposes and implements new regulations to force its preferred outcomes.

But Trump now faces federal courts with newly sharpened teeth. In Loper Bright Enterprises v. Raimondo (2024) and Relentless, Inc. v. Department of Commerce (2024), the Court overruled Chevron, ending compelled deference.

Perhaps in the near future, federal judges will rule whether inflation is a “cost” in calculating capital gains.

Bipartisan Support

Ideally, the necessary changes would be made by statute.

An overhaul of the IRC is long overdue. There have only been three major codifications of the IRC: in 1939; in 1954; and in 1986 (prior to 1939, individual revenue acts were reenacted every few years).

The US and global economies have changed significantly in the past few decades. Congress enacts patchwork legislation to modify the IRC as it sees fit. But foundationally, we are still operating under a tax code from 1986. And we’re still hammering out basic details—in 2024, the Supreme Court ruled on a case to refine the definition of “income.”

Don’t hold your breath for a major overhaul of the IRC. But don’t give up hope if you like the idea of inflation indexing.

If courts strike down an attempt to index inflation via the Treasury regulations, it could be implemented via legislation, even if it isn’t a comprehensive IRC overhaul.

There’s reason to believe this is politically feasible.

Yes, the subject of taxation is an extremely valuable political football. Putting the bill to a vote would make for quite the show. Sincere or otherwise, many Democrats would make a big fuss about tax breaks for the rich.

But critically, megadonors to both parties want to reduce their effective tax rates. And when they’re not behaving like influencers on social media, politicians from both parties seem most concerned with their personal portfolios.

The real game would be securing the necessary number of votes and then determining which politicians get to vote “nay” (and use the media to rile up their base), and which would sheepishly vote “yay” (and suffer temporary embarrassment). Of course, both parties engage in this kind of charade… it’s just the DC way.

Don’t shoot the messenger.

Canary in the Coal Mine?

In 1977, Barron’s reported, “According to the Business Roundtable, over 80 percent of the capital gain on common stocks, as measured by Standard and Poor’s Index of Common Stocks, from 1960 through 1973, was merely inflation gain.”

The Tax Foundation reports that inflation was so bad by the late 1970s that many investors regularly paid capital gains taxes despite experiencing real losses—meaning inflation outpaced their stock gains.

I’m not sure what statistics and formulas would be used to index inflation. It’s against the interests of The Powers That Shouldn’t Be to admit the true extent of inflation. They prefer to obfuscate and hide behind academic studies and jargon, despite many of their core beliefs being demonstrably false.

But might Trump’s proposal be a canary in the coal mine?

Perhaps key figures in the Trump administration see inflation being a significant problem for years to come. This proposal allows them to address inflation (especially for the wealthy) without admitting it’s a serious issue.

Inflation has been and will continue to be problematic.

Few politicians earnestly attempt to curtail spending. Those who do have little to no meaningful power. For both parties, the incentive is to spend as much money as possible. The status quo has tremendous inertia… as Lyn Alden says, “Nothing stops this train.”

Debt-servicing payments are now approximately $1.4 trillion annually (roughly 46% of the $3.01 trillion collected from individual income tax in 2025). The principal never gets retired. And most voters, politicians, and bureaucrats can’t stomach a mere discussion of reduced spending, never mind tangible cuts.

So, for now… choo-choo!

But rolling over debt and wartime levels of deficit spending can’t go on forever. At some point, both must be addressed.

Ultimately, there are only three ways to deal with the debt:

Repay in full.
Default openly and honestly.
Effectively default by printing money.

Each option will cause pain. But they differ in when the pain is suffered and by whom.

Considering the cast of characters in DC, which do you think is the most likely path?

I hear printers whirring.

Trump talks a lot. But this proposal may have legs. Politicians and their donors want to get their ducks in a row before inflation get out of hand.

Economic Outcomes

Politics convinces many people that they get to pick and choose when economics applies to their own ideas, especially regarding taxation.

Take, for example, so-called “sin taxes,” like those on alcohol. Taxes on alcohol raise the price, which discourages consumption.

Simple enough.

But the same dynamics apply to investment and wealth creation. Capital gains taxes increase the cost of making investments aimed at creating wealth. Just as sin taxes discourage the consumption of alcohol, capital gains taxes discourage investment and reduce wealth creation.

This can be seen in the data.

From a 2006 piece in National Review, we learn:

When the top capital-gains tax was slashed from 49 percent in 1997 to 20 percent in 1983, the amount of venture-capital funding for new firms increased from $68 million to $5.1 billion—a 700 percent increase. Conversely, when the capital-gains rate was raised to 28 percent, venture-capital funding fell by almost 60 percent (between 1986 and 1991).

Of course, there are many other factors at play, like monetary and fiscal policies, and tax-related regime uncertainty. But there is sound economic reasoning behind these figures.

Indexing for inflation would reduce the effective capital-gains tax rate, with less political fallout from explicitly “cutting taxes on the rich.” And there’s good reason to believe that doing so would attract capital, foster wealth creation, and possibly increase tax revenue… which would be a net positive for Americans, right?

Branches in the Canopy

Critics may complain that this policy would be a giveaway to the rich. But investing became a barstool sport during the COVID-19 lockdowns. The younger Robinhood crowd would likely be on board. I suspect that older generations would offer their enthusiastic support if inflation adjustments also applied to real estate transactions. Besides, letting people keep more of what they’ve already earned gives them nothing they didn’t already have.

It is, however, undeniable that capital-gains tax policies disproportionately impact the wealthy.

Income and net worth might be the traditional demarcation of the different branches of the K-shaped economy. But asset ownership is the mechanism behind the gap.

Consider the most recent data published by the IRS:

For the top 1% of income earners, wages and salaries account for 35% of their adjusted gross income (AGI), and capital gains account for 22%.
For the bottom half of income earners, wages account for 81% of their AGI, and capital gains account for just 0.4%.

Those who want to jump to the upper branch, or climb higher still, should ask themselves if trading time for a salary is the best path.

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Investing in equities is another.

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