Stop taxing inflation

With the cost of living on every voter’s mind, an old idea is getting a new push on Capitol Hill: fixing a flaw in the tax code that makes everything more expensive.

Anyone who has ever sold a home, stock, or even a collectible is familiar with it. When you sell an asset that has risen in price, the IRS taxes the gain. But that gain is measured against the price you paid, not your true cost. If you bought a stock, a bond, or a business many years ago, and its price merely kept pace with inflation, you are no richer in purchasing power than the day you bought it — yet the tax code treats the difference as income and taxes it anyway. This is especially noticeable in periods of high inflation, like the last five years.

It is a tax on rising prices, dressed up as a tax on profit. And every year inflation quietly increases the amount we owe without a vote from Congress or an action from the president.

The distinction is more than semantic. Cost is the time, energy, and resources it takes to acquire something — it is “real,” and it holds its meaning across time. Price is “nominal” — transitory, dependent on the value of the time and place it happens to be paid in. And although the letter of the law taxes “cost,” the term was left undefined. Decades of administrative interpretation have effectively turned it into a tax on prices instead.

The idea of fixing this — that is, indexing capital gains so that only real gains are taxed — is not new. Conservatives have urged it for more than 30 years. George H.W. Bush’s administration considered the policy in 1992.........

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