The Capital Gains Tax Indexation Debate Is Back

The longstanding debate over whether capital gains taxes should be indexed for inflation has resumed in full force.  The arguments are familiar and the principles are unchanged.  Indexing capital gains taxes by regulation would still be a mistake.

Capital gains tax indexation initially seems appealing.

Consider an investor who buys an asset for $100 and sells it decades later for $250.  If consumer prices doubled during that time, the investor needs $200 to get back the buying power she gave up to purchase the asset.  So, selling the asset for $250 really leaves her only $50 ahead.  Under indexation, she would be taxed on that $50 real gain rather than the $150 apparent gain taxed under current law.

At first glance, that looks like the right result.