Assets like homes or stocks that people have purchased with their own money should be a source of economic security for Americans, not aggravating tax liabilities. Play “Two Truths and a Lie” to find out how we can reform capital gains taxes to create a fairer system.
A. High inflation has caused American households to grow wealthier on paper.
B. Indexing capital gains for inflation would greatly expand the U.S. economy.
C. In recent years, lawmakers have adjusted the capital gains exclusion on primary home sales to more accurately reflect home prices today.
A. TRUTH! For decades, the inflation rate remained low and stable, hovering at or below the Federal Reserve’s two-percent target rate. Over the past four years, due to massive federal spending and loose monetary policy, inflation skyrocketed to a 40-year high. On paper, American households grew wealthier through stock market gains and ballooning home values. However, real losses could become taxable when asset holders cash out their investments.
Policymakers should index capital gains for inflation to decrease the amount of profit subject to taxation and prevent massive tax bills on inflation-related asset gains. There is ample precedent for such an action. We already adjust different tax provisions for rising prices, such as income tax brackets, income thresholds for some tax credits, and standard deductions.
B. TRUTH! The macro impact of indexing capital gains for inflation could be immense. In 2019, two dozen U.S. senators asked the Treasury Secretary to exercise executive authority in adjusting capital gains for inflation. They noted that it would “unlock capital for investment, increase wages, create new jobs, and grow the economy,” by incentivizing “investors to realize gains on their investments, which opens up those dollars to new, more efficient allocations.” According to 2018 estimates by the Tax Foundation, this policy would grow the economy by approximately $22 billion over the long run. After-tax incomes would rise by 0.2 percent on average for all taxpayers, and an additional 21,800 full-time jobs would be created. Although this proposal reduces federal revenue by an estimated $178 billion, some of that would be offset by economic growth.
C. LIE! Homes are one of Americans’ largest assets and sources of wealth. When a homeowner sells his or her property, the tax code permits him or her to exclude $250,000 of gain (and married couples filing jointly up to $500,000) from taxes. The exemption may be taken only once every two years. This exclusion exempts the capital gains for a large majority of homeowners.
The federal government has not increased these amounts since 1997. In light of both high inflation and the rapid expansion of home values, there is legitimate concern that built-up home equity outpaces this exclusion. The Tax Foundation finds that, in today’s dollars, the exclusions would need to be $382,000 and $764,000, respectively, to provide the same level of relief.
Bottom Line:
Indexing capital gains for inflation will continue conservatives’ pro-growth tax agenda that began in 2025 with making the 2017 tax cuts permanent, cutting unpopular taxes on working Americans, and indexing provisions for inflation. Adjusting tax policy for future inflation protects Americans’ wealth and empowers women to build enterprises and secure their futures.
To learn more, read the “Policy Focus: Protecting Your Wealth from the Tax Man: Reforms to Capital Gains Taxes”