The initial wave of tax cuts has been trumpeted for their success by small business owners around the nation. Linda McMahon of the Small Business Administration has heard this time and time again in her travels across the country. Trump tax cuts have helped what otherwise might have been a more difficult time for businesses. While optimism about the economy is high, it is a total workers market in regard to wages. Business owners cannot find the number of skilled workers that they demand. The demagogues will continue to put out the false narrative that the tax cuts only benefit the “one percenters,” who by the way, pay for the majority of the handouts such politicians give to their bases. So perhaps it could be time to ring the bell for round two of tax breaks.
The Trump administration has their eyes on the capital gains tax. A beloved assessment by the distributors of wealth, who can subject a person to not one, but two taxes on money they have made by making successful investment decisions. Yes, society must penalize those who have profited by the sale of their home or by investing in the publicly traded company in their hometown. How American. Don’t get me started here.
The Trump capital gains proposal is weak at best, and has all the markings of appeasing the socialists for benefit elsewhere. If you want me to jump up and down for an inflation based capital gains cut, I can’t do it. Right now if you’ve got an asset, like stock or equipment, and you sell it, you’re likely subject to a 20 percent tax because it’s considered a capital gain. So for example, if today you sell an asset that you purchased 20 years ago for $10,000 and your cost was $7,000, you would have a $3,000 gain. If the administration’s proposal goes through then you would be allowed to exclude the inflationary effects of that gain over the past two decades, which means your gain would be lower and you would pay lower taxes. Maybe this gets some of you excited, I don’t know.
Inflation-related gains on the sale of assets are not a real increase in wealth. Indexing the purchase price (tax basis) for inflation would provide savers some relief for this type of tax on fictitious income. With that said, anything is better than nothing. In my estimation, the impetus behind this is the thinking of Larry Kudlow, chief economic advisor to President Trump. He has been a proponent of indexing capital gains to inflation and has written extensively on it. Kudlow makes the case in the following example. Let’s say an investor bought $1,000 worth of a company’s stock in 2000. Today, it’s valued at $1,500. If she sold the stock, she’d face up to a 23.8% capital gains tax on the $500 gain. (That’s not counting any state-imposed capital gains taxes.) But in real terms, her investment has gained only $7. So, her effective capital gains tax rate is 139%. If the gains were indexed to inflation, her tax bill would be $1.67 instead of $119.
The desire here is that this indexing will have a trickle-down effect on small business. The bottom line is that there will be more cash available. The cash can be used for a myriad of investments. Currently, surveys show that small business owners have invested free cash flow in marketable securities, posting significant gains over the past years of stock market increases. Any tweaking of capital gains in favor of business will add fuel to the fire of the current mergers and acquisition boom going on across the nation for business owners looking to sell. All in all, the indexing of inflation will help, albeit not to the point of total reduction, but hopefully to somewhat of a meaningful number that will continue to fuel economic growth.