Letter of Support: Rep. Walsh's Capital Gains Inflation Relief Act, H.R. 2945

October 05, 2011 J

Dear Representative Walsh,

On behalf of more than 1.8 million Americans for Prosperity activists in all 50 states, I commend you for introducing the Capital Gains Inflation Relief Act, H.R. 2945. By indexing the value of capital gains for inflation, your bill corrects a long-standing problem in our tax code that locks out capital investment and continues to hold back economic and employment recovery.

Under current law, capital gains are taxed based on their nominal value. For example, if an investor purchased $1000 worth of stock in 2005 and sold it for $1200 in 2010. Currently, that investor would be taxed on the $200 nominal gain. However, our tax code ignores that prices increased over that period of time, a total of 11 percent inflation from 2005 to 2010. That $1000 would really only be worth $1100 today with inflation, so his real inflation-adjusted gains are only $100 ($1200 minus $1100).

When inflation was higher back in the 1970s and 1980s, the effective tax rate on capital gains sometimes even ran above 100 percent, meaning that investors paid more in taxes than what they had really gained on their investment. In short, because the code doesn’t allow investors to adjust for inflation, the government currently taxes people for phantom gains – a good portion of capital gains taxes is nothing more than an “inflation tax.” This needs to be fixed.

Eliminating the inflation tax would be a boon to the economy. Returns on investments will increase, boosting the incentive for capital formation. With lower effective tax rates on their gains, entrepreneurs will break ground on more new endeavors that now surpass the break-even point, increasing economic activity and creating jobs. The “lock-in” effect – when investors hold onto assets to avoid paying the capital gains tax – will be reduced and capital will flow more effectively to productive uses. Even the tax code will become more efficient with the elimination of inflation-induced uncertainty in tax rates. As tax economist Curtis Dubay explained,

One of the basic tenets of sound tax policy is that the system should aim for neutrality, levying the same effective tax rates on all investments over time. The more neutral our tax system, the more taxpayers are able to make decisions for purely economic reasons without being swayed by tax considerations.

In truth, capital gains taxes should be abolished in order to avoid the double taxation of the same dollar. In the meantime, indexing capital gains for inflation is a promising first step. Common sense dictates that the tax should fall on real, not phantom, gains.

Americans for Prosperity is proud to support the Capital Gains Inflation Relief Act, H.R. 2945. I urge your colleagues to support its passage, and I look forward to working with you in the future.


James Valvo
Director of Government Affairs
Americans for Prosperity

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