The Wall Street Journal-20080125-Indexing Taxes- Why Stop at Capital Gains-
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Indexing Taxes: Why Stop at Capital Gains?
Richard Rahn's ("Inflation and the Tax Man," op-ed, Jan. 17) enthusiastic review of Mayor Rudolph Giuliani's indexing of capital gains is another idea which deserves to be heard and then discarded. The tax code is what it is because proponents of equity have repeatedly incorporated their pet projects without considering the fact that their tax benefits inevitably breed tax abuses, or demands for equitable relief from other quarters. The consequence brings about anti-abuse legislation (think Alternative Minimum Tax) to say nothing of more billable hours for the accounting profession.
If we were to consider inflation indexing for capital assets, let's also index the other side, debt financing. Creditors could claim inflation losses and debtors would be required to report income for paying back nominal instead of inflation-adjusted dollars. The debtors then will be able to claim a negative inflation adjustment for equity investment, however that might be computed.
Obviously we would no longer need the Accelerated Cost Recovery System, which speeds up the tax benefits of depreciation for the owners of depreciable business property, since their inflation detriment is already compensated by the inflation adjusted tax code.
Before advocating tax policy changes, Mr. Rahn may want to heed a paraphrase of Prof. Martin Ginsburg's admonition that every stick designed to beat the IRS commissioner, will metamorphose into a snake which will bite the taxpayer's hind part.
Del Diebig
Salem, Ore.
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Mr. Rahn is correct when discussing the fairness and logic of indexing capital gains. But why not extend this concept to interest income? When a person has a savings account that pays 3%, and inflation is 3%, there is also no real gain. But our current tax system pretends a profit has occurred, taxes the account holder on his phantom "income," and thereby forces him into a loss position.
Mr. Rahn's comment that "Over the years numerous economists, lawyers and others have tried to fix this problem and have gotten nowhere with Congress" is ironically true. The indexing of capital gains was a promise of the Republicans' 1994 Contract with America. After capturing both the House and Senate -- largely because of the Contract -- this promise was diminished to indexing future capital gains only (non-retroactive), then to no indexing at all.
With the Republicans having failed taxpayers so completely on this issue, it would be interesting to know how Rudy Giuliani would implement his indexing proposal with the probable opposition of a Democrat-controlled Congress.
Carl B. Lind
La Jolla, Calif.
