Home Up WSJ 8/31/92 CJCooper


Indexing Gains For Inflation

One of the justifications for historically having a lower tax rate for long term capital gains taxes than for normal types of income is the fact that some of the gain is really just an increase in the cost of living between the date the asset was purchased and when it was sold.  However, using just one tax rate doesn't distinguish between the changes in cost of living for an asset sold after only 12 months (the current threshold for long term treatment) or an asset sold after 30 years. 

An idea that has been discussed for decades is adjusting the cost of assets by the inflation that has occurred since their purchase.  

When it comes up for discussion in D.C., there is always someone very eager to claim that to adjust cost bases is too difficult and would therefore by unenforceable.  That is a big pile of B.S. and they know it.  It is a very easy task to obtain the cost of living figures.  I remember getting them from the government back in 1992 to illustrate this point.  It was a snap.  Now, with the web, there are several sites from which the official CPI numbers can be obtained.  Many of them will actually do the inflation adjustment calculations for you.

For example, suppose you bought some land for $10,000 in 1976 and are selling it for $30,000 in 2001.  Based on the historical interpretation of the cost basis, you would have a taxable gain of $20,000.  However, using this CPI calculator, the inflation adjusted basis would be  $31,283, yielding a net loss in purchasing power. 

George H. W. Bush (aka Bush-41) was essentially fired by the voters of this country for his incompetence when it came to taxes.  First, he flagrantly broke his "Read my lips - no new taxes" 1988 campaign promise.  He also refused to exercise any initiative when it came to reducing the tax burden.  A golden opportunity was literally handed to him in the Summer of 1992 to show the voters that he wasn't as much of a wimp as he appeared to be; and he refused to act on it.  

I have refrained from any criticism of George W. Bush (aka Bush-43) because he has been receiving such ungodly amounts of it from the professional Bush-bashers in the media.  However, my fear, and that of many other conservatives, is that he is so eager to come across as the compassionate conservative that he will follow in his father's footsteps and wimp out from any real tax law reform.  

Specifically, I am referring to the study that was published in August 1992 concluding that the President has the authority under the Internal Revenue Code to issue an executive order defining the cost basis of assets to be adjusted for changes in purchasing power.  At the time the study came out, the Wall Street Journal printed a long article from one of the study's authors and published editorials encouraging Bush-41 to issue such an order.  Other supporters of capitalism did everything we could to push him off of the fence on this issue.  I wrote several articles back then on this very point and included a discussion of it in most of my speeches and seminars. 

Basically, the study concluded that the term "basis" as used in the tax code is vague and ambiguous and subject to interpretation.  For the past several decades, the tax collectors at IRS have interpreted that term to mean constant dollar amounts.  An asset purchased in 1976 for $10,000 would have a cost basis today of the same $10,000.

Since the IRS is part of the Treasury Department, and thus under the control of the Executive Branch and the President, they have the ability to change the traditional interpretation if they so desire to allow for adjustments to compensate for the changes in historical purchasing power (inflation).  

As we all know, Bush-41 lived up to his wimpy image and refused to do take such a bold step.  The rest is history.  He turned over the control of the Internal Revenue Code to a bunch of Marxists who were not about to do anything to reduce the government's take.    

With the Marxists finally out of the White House, I think it is time to resurrect that idea.  Having an excellent memory when it comes to such important matters, as well as a huge collection of clippings and other reference materials, I pulled out my copy of the original study and the original Wall Street Journal editorial about it.  I contacted the National TaxPayer Union, which had sponsored and published the original 90+ page study and reminded them of it after I was unable to locate any mention of it on their website.  

I am happy to report that the fine people at NTU have finally scanned the original report in and have it posted as a PDF file on their site

They have come to the  to the same conclusion as I have; that nothing has changed in the tax code since 1992 that would prevent the President from issuing an executive order changing the definition of cost basis to take into account changes in the cost of living.  All it requires is a backbone.  If Bush-43 really is serious about wanting to reduce the taxes on capital gains, this would be a much quicker way to accomplish that than to try to get it through Congress.  If the Socialists in Congress don't like the new interpretation, they will have to pass a law explicitly changing the tax code to be very specific in the definition of the term "cost basis" to be the constant dollar amount.  If such a law were to actually make its way to the Oval Office, this would give Bush-43 another opportunity to flex his tax-cutting muscles by vetoing it.  In my mind, this is a no-brainer for the Bush administration and I  fail to understand why I am the only one discussing this approach.



This page was updated:
Sunday, January 29, 2012

Kerry M. Kerstetter
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Harrison, AR  72601
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