The Trump administration is considering changing the capital gains tax rules to adjust for inflation. Although the idea seems sensible at first glance, its appeal fades under closer scrutiny. Making the change without the approval of Congress might be illegal and would certainly be undemocratic. Even with legislative approval, an inflation adjustment for capital gains, but not interest payments, would be seriously flawed.
This is how the proposed inflation adjustment would work. A person who sells a capital asset is taxed on any gain from the sale. Under current rules, the gain is the amount for which the asset is sold minus the amount paid to buy it. For example, someone who bought shares of stock 10 years ago for $100 and sells the shares today for $120 must pay tax on the $20 gain.
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