Bite of Capital Gains Taxes Can Be Eased, as Greenspan Foresaw, by Adjusting for Inflation

When the former Federal Reserve chairman, Alan Greenspan, died at 100, the tributes to him were amazing. He had been appointed on a bipartisan basis by four presidents — Ronald Reagan, George H.W. Bush, Bill Clinton, and George W. Bush. Greenspan’s domination of economic dialogue — and his capable 19-year chairmanship of the Federal Reserve between 1987 and 2006 — made him a giant towering over the economic debate about America’s future.Various articles resurrected the title which Greenspan had acquired during the amazing prosperity of the 1990s. Then, he was “the Maestro.” During his chairmanship, America had low inflation and dramatic economic growth, including rising personal incomes and dramatically growing pension funds and personal savings.Greenspan’s death is also a good time to remember his opposition to capital gains taxes because they were killers of jobs and economic growth. Greenspan thought if complete repeal of capital gains taxes was politically impossible, then we should adjust for inflation. He argued people shouldn’t have to pay taxes on fake appreciation driven by a declining currency rather than a real gain.Greenspan was a libertarian. He admired Ayn Rand and her relentless belief in the individual rather than the corporate state. He believed in balanced budgets, lower taxes, limited government, and entrepreneurial growth.A great achievement of the Republican Congress while I was Speaker was to work with Mr. Clinton to balance the budget for four consecutive years for the only time in a century.Greenspan was thrilled by this and testified to the Senate that the Federal Reserve expected the federal debt to be paid off by 2009. He was trying to think through how to manage the money supply if there was no debt (something we had achieved only once, briefly, in 1837). Unfortunately, those who followed us did not understand what we had done. Today, we have a $39.2 trillion national debt with interest payments bigger than the entire national security budget.Working with Greenspan, I shared his passion for getting rid of the capital gains tax. We both believed that taxing capital gains slowed down investment, kept money invested in older businesses, and hindered the ability to shift capital to invest in emerging new companies and technologies.Capital gains taxes affect millions of Americans. More than 30 million households file capital gains taxes, and three-in-four capital gains households are making less than $200,000 a year.This understates the impact of having a better economy with lower capital gains taxes. The fact is a more rapidly growing economy helps every American with more jobs, better salaries, and a more modern, technologically advanced economy. The result is also a dramatic increase in tax revenue for the government.On February 25, 1997, Greenspan testified to the Senate Banking Committee that if the tax were eliminated, we would likely see more government revenues from rising personal and corporate revenues. As he put it, “while all taxes impede economic growth to one extent or another, the capital gains tax is at the far end of the scale. I argued that the appropriate capital gains tax rate was zero.”We took a step toward Greenspan’s suggestion in 1997, when we reduced the capital gains rate from 28 percent to 20 percent (and from 15 percent to 10 percent for taxpayers in the 15 percent bracket). The result was an enormous boom in new companies and technologies. Before the tax cut, the old rate was generating a little less than $70 billion in revenue. By 2000, the new rate had led to such a dramatic increase in capital gains investing that the government collected more than $120 billion in capital gains taxes. So lower rates had clearly produced higher government revenue through greater economic growth. This doesn’t count the increase in individual and corporate taxes from the larger economy.Like Greenspan, I believe if it is politically impossible to eliminate the capital gains tax, it should at least be indexed to price increases — so that people aren’t effectively paying taxes on inflation.President Trump has indicated he thinks he has the authority to index capital gains by presidential decree.In the Senate, Senators Ted Cruz and Tim Scott recently sent Treasury Secretary Scott Bessent a letter calling for Treasury rulemaking to end the so-called inflation tax. The House Republican Study Committee’s Plan for Reconciliation 2.0 also calls for ending the taxation of inflation.Americans for Tax Reform and 30 other conservative groups recently sent Mr. Bessent a letter supporting his ability to end this inflation tax.If the Trump administration and Republicans are looking for a big boost in the economy between now and November, indexing capital gains would be enormously popular.

Bite of Capital Gains Taxes Can Be Eased, as Greenspan Foresaw, by Adjusting for Inflation

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