SHOULD TAXES on capital gains be indexed to reflect inflation? This old issue has been resurrected by the House Ways and Means Committee. Chairman Bill Archer, R-Texas, is all for it; President Clinton describes it as veto bait threatening the $85 billion net tax cut measure he accepted in his balanced budget agreement with Congress. As for House Speaker Newt Gingrich, it just is not "a make or break issue."
Precisely. In theory, most economists agree that indexing the entire tax code would be a good thing -- if it could be done without horribly complicating the whole tax reporting and collection system. Perhaps computer technology will eventually do the trick. But for now, the experts can't even agree on what the inflation rate really is. Fed chairman Alan Greenspan says the government's consumer price index grossly exaggerates inflation, thus leading to costly and unjustified increases in Social Security benefits and other big-ticket programs.
Mr. Archer, we suspect, inserted indexing into his tax bill mainly as a bargaining point in dealing with a Senate that is shunning the whole idea and a president who believes it would be too costly. His main goal is to lower the capital gain tax to 20 percent from its present 28 percent level for most taxpayers.
Those who advocate the added step of indexing make the
following argument: If you buy a $10 share of stock whose price rises to $15 over a period in which inflation goes up the same amount, you should not be taxed on the $5 capital gain. After all, the real value of your asset has not changed. Few would dispute that, in the abstract.
But the inflation sword cuts both ways. It also exaggerates the deduction one can claim on home mortgage interest, for example. Mr. Archer's indexing plan does not include this. It is only partial, and therefore flawed in principle.
The current debate over capital gains taxes would not be occurring if Congress and Presidents Bush and Clinton had clung to the great tax reform of 1986, which treated all income alike. But the temptation to use the tax code for social and economic engineering was too alluring. The result: a tax code ever more complicated and far short of meeting the fairness test.
Pub Date: 7/03/97