Newt Gingrich: Why THIS must happen next in Trump’s economic revolution

The next big step in President Trump’s economic revolution should be to index the capital gains tax. This bold step would dramatically accelerate economic growth, liberate capital, boost investment, and reward those who have had faith in investing in the American economy.

President Trump’s economic policies – cutting regulations and taxes, fighting for better trade deals, pushing the sale of American products abroad, giving small business owners and entrepreneurs confidence – have begun to drive growth beyond the expectations of establishment economists and commentators.

Throughout the 2016 presidential campaign, so-called experts warned that candidate Trump’s appeal for 4 percent annual economic growth was impossible. Of course, four years earlier, these same people – including President Obama – had derided my proposal for getting gasoline to $2.50 a gallon by expanding production as demagoguery.

Now that President Trump has delivered an annual rate of growth of the gross domestic product of 4.1 percent for the second quarter (along with the lowest African-American and Latino unemployment rates recorded and a surge in business investment) these same liberal experts are warning that this growth is unsustainable and is a “blip” on our economic radar.

One way to ensure the supposed blip becomes a long-term boom would be to index capital gains to inflation.

The proposition is quite simple. With inflation, on-paper values go up even if real values don’t. As a result, you can owe taxes based on the on-paper value of your investments – even when their real value has declined.

Simply put, inflation is a product of the government’s failure to keep the dollar stable, so Americans should not have to pay taxes on it.

Before Larry Kudlow became the director of the National Economic Council, he wrote: “Former Treasury economist Gary Robbins estimates that indexing capital gains for inflation this year would, by 2025, create an additional 400,000 jobs, grow the U.S. capital stock by $1.1 trillion and boost GDP by roughly $500 billion. That all translates to an additional $3,600 for the average household.”

Furthermore, in a 1993 memo by Charles Cooper, Michael Carvin, and Vincent Colatriano on the legal authority for the Department of Treasury to index capital gains taxes to inflation, they said they “believe that the Treasury has administrative discretion to reinterpret ‘cost’ to take account of the economic reality that a ‘gain’ attributable solely to inflation adds nothing to the taxpayer's real wealth or purchasing power. The term ‘cost’ is subject to more than one reasonable interpretation and is readily amenable to a construction that takes account of inflation.”

Finally, as Kimberly Strassel wrote in The Wall Street Journal, this idea is further bolstered by a 2012 paper by Cooper and Colatriano that argues “the Internal Revenue Code does not require that the ‘cost’ of an asset be measured only as its original price – meaning there is no reason Treasury could not construe it in today’s dollars. More important, (the 2012 paper) noted that since the Supreme Court decision in Verizon Communications v. Federal Communications Commission (2002), regulators have leeway in how they define ‘cost.’”

Americans for Tax Reform President Grover Norquist has been leading the fight to index capital gains. He calls it an inflation tax. This is a good label that Republicans should adopt.

In the past, when we have cut the capital gains tax (which we did with the Taxpayer Relief Act of 1997 when I was speaker of the House of Representatives), we have seen an increase in capital gains tax revenue. Lowering the tax promotes more economic activity, which increases the base for government revenue. It’s that simple.

Indexing capital gains to eliminate the inflation tax would be one more step in accelerating the growth of the Trump economy and distinguishing it from the economic decay of the past.

President Trump should act now to end the inflation tax and strengthen our economic growth.