It is wrong to tax inflation.

Last week, President Donald Trump agreed. He endorsed the idea of indexing capital gains so that no American would be taxed on the inflation gain on the sale of a house, land, a small business, stocks or assets of any kind. Trump said, “Many people like indexing, and it can be done very simply. It can be done directly by me.”

One day later, Trump told a press gaggle that he’s “not looking to do indexing. … But if I wanted to do it, I believe I could.”

The press gasped at the sudden shift from “I will” to “I won’t.” Greenland was ours for longer. But those who have worked to end the taxation of inflation in capital gains for almost 30 years noticed what did not change. The president stated and restated his view that his administration could define the cost of an asset for tax purposes as cost plus inflation. No vote by Congress required. This could happen whenever Trump chose.

That is a game-changer.

The present capital gains tax is particularly brutal to older Americans who bought a home, built a small business or invested in the stock market before the hyperinflation of the late 1970s. Older Americans who have lived through many years of even modest inflation are increasingly paying taxes on mostly imaginary “gains.”

Those damaged most? Older voters. Rural voters. Midwest voters. Homeowners. Self-employed small-businessmen and women. Aka: Trump voters in swing states. Inflation is a larger part of the capital gains taxes they pay.

How important would this change be for Americans?

If you bought a share of IBM stock in 1970 for $14.81 and sold it today for $134.42, you would pay $28.47 in capital gains taxes. Eliminating the inflation over that period reduces your tax bill by 70%.

Texas farmland averaged $722 an acre in 1986. In 2019, that land was nominally worth $2,815, for a capital-gains tax owed of $482. Take out inflation and the tax falls to $247 per acre — a 50% reduction.

Ending the taxation on inflation for capital gains would immediately increase the value of every asset — land, homes, stocks, business — in the United States. A signature by the Treasury Secretary would make the U.S. wealthier. For the few? Well, 99.5 million U.S. individuals own mutual funds, and about 78 million Americans own homes. There are millions of farmers and ranchers. More than 30 million small businesses. The stale rhetoric of tax cuts benefiting only the “1 percenters” rings hollow.

Twenty-four million American households had a capital gains filing in 2016. And 56% of those households earned less than $100,000 per year. More than 80% earned less than $200,000.

The other gain from indexation is deregulatory. Dan Clifton of Strategas Research Partners points out that trillions of dollars of land and buildings are held by corporations but not sold solely because of the heavy inflation tax. End that tax, and companies would offload “sticky capital” that remains underutilized. Those assets would be liberated to be put to highest and best use — a massive increase in productivity nationwide. And the deficit? Clifton predicts “a gusher of revenue from trillions of dollars’ worth in older corporate assets sold as quickly as the contracts can be written.” Scott Hodge, president of the Tax Foundation, told this writer that the Tax Foundation’s model “and every model I am aware of” misses this seismic shift because they assume (counter factually) that all capital is perfectly allocated already.

Trump says he’s “not looking to do indexing.”

He will.

Economic growth has declined from 3% annually toward 2%: President Barack Obama’s average. Trump would like to increase growth. Four options. One, get the Fed to reduce interest rates. Two, get House Speaker Nancy Pelosi, D-Calif., to agree to a pro-growth tax cut. Three, win or end the trade war with China. And four, index capital gains. The first three depend on the cooperation of the Fed, Pelosi or China. After a while, Trump will refocus on the one lever solely under his control: indexation of capital gains.

Is Trump correct that he has the authority? Well, things have changed since 1992, when the George H.W. Bush administration decided it could not change the definition of “cost” from “historical cost” to “real cost.” In 2002, the Supreme Court ruled in Verizon v. Federal Communications Commission that the word “cost” was “protean” and can be defined by regulators as they wish. Further, two months ago, in Kisor v. Wilkie, the court reaffirmed the authority of federal agencies to interpret legislative language.

The Democratic presidential candidates will likely denounce the move and promise to rescind it. But this would allow all Americans to calculate exactly what they have to lose if a Democrat wins the presidency in 2020. More than 100 million Americans will note that the difference between Trump and the Democrats can be measured in thousands or tens of thousands of dollars. A powerful incentive to vote. Worth a ride to the polls.


Grover Norquist is president of Americans for Tax Reform. He wrote this article for the Washington Post.