Option 13:
Index Capital Gains Realizations to Inflation
Topline Estimates
Source: Tax Foundation General Equilibrium Model.
Capital gains (losses) are the increase (decrease) in the value of a capital asset between the time it was purchased and the time it was sold without any adjustment for inflation. Without an inflation adjustment, the capital gains tax falls on real gains as well as inflationary gains, which increases the effective tax rate on saving. If indexing capital gains were done alone without indexing other aspects of the tax code to inflation, it could worsen other distortions and create opportunities to shelter income.
This option indexes all capital gains to inflation, removing the tax on “fictitious” income, or gains driven by increases in the price level, and taxing real gains only. Indexing gains would lower the tax burden on saving and increase the incentive to save. Domestic saving would rise, and more of the returns to domestic investment would flow to Americans. However, the larger budget deficit would increase federal government borrowing, and more interest payments would flow to foreigners, resulting in a decline in GNP.
On a conventional basis, this option would increase the primary deficit by $796.5 billion over the budget window. Long-run GDP would be unchanged, while long-run GNP would fall by 0.1 percent. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 182.3 percent by 2056.
On average, in 2036, taxpayers would see increases in their after-tax incomes of 0.4 percent. The top quintile of taxpayers would experience a 0.6 percent increase, whereas the bottom quintile would experience a less than 0.05 percent increase. On a long-run dynamic basis, taxpayers would see a 0.4 percent increase on average.
Modeled Results
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About the Authors
Erica York is Vice President of Federal Tax Policy with Tax Foundation’s Center for Federal Tax Policy. Her analysis has been featured in The Wall Street Journal, The Washington Post, Politico, and other national and international media outlets.
Garrett Watson is Director of Policy Analysis at the Tax Foundation, where he conducts research on federal and state tax policy. His work has been featured in The Washington Post, The Atlantic, Politico, the Associated Press and other major outlets.
Dr. Huaqun Li is Senior Economist, Director of Modeling Projects at the Tax Foundation. She focuses on developing and maintaining the Foundation’s Taxes and Growth Model, which models the budgetary and economic effects of changes to federal tax policy.
Dr. William McBride is the Chief Economist & Stephen J. Entin Fellow in Economics at the Tax Foundation, where he oversees major research projects primarily related to reforming the federal tax code, advancing sound tax policy, and improving the federal government’s fiscal outlook.
Alex Durante is a Senior Economist at the Tax Foundation, working on federal tax policy and model development. Alex worked as a research assistant at the Federal Reserve Board and served as a staff economist on the Council of Economic Advisers.
Alex Muresianu is a Senior Policy Analyst at the Tax Foundation, focused on federal tax policy. Previously working on the federal team as an intern in the summer of 2018 and as a research assistant in summer 2020. He attended Tufts University, graduating with a degree in economics and minors in finance and political science.
Peter Van Ness
Peter Van Ness is a Research Software Developer at the Tax Foundation working on federal tax policy and model development. Peter previously worked as a research assistant at another think tank and as a data analyst at a consulting firm.
Aleksei Shilov
Aleksei Shilov is a Research Software developer at the Tax Foundation working on economic model development and federal tax policy. Aleksei joined the Tax Foundation as an intern in January 2025. He holds a B.S. in computer science and a minor in economics from Northeastern University and is currently based in Boston, MA.
Daniel Bunn is President and CEO of the Tax Foundation. Daniel has been with the organization since 2018 and, prior to becoming President, successfully built its Center for Global Tax Policy, expanding the Tax Foundation’s reach and impact around the world. Prior to joining the Tax Foundation, Daniel worked in the United States Senate at the Joint Economic Committee.