The Trump administration may be considering a proposal to cut capital gains taxes by indexing gains to inflation. Experts say the change would overwhelmingly benefit wealthy Americans.

National Economic Council Director Kevin Hassett said last week in an interview with Fox Business host Larry Kudlow that Trump is looking for new policy ideas that could give voters more incentives to support Republicans in November.

"He wants to hit people with the things that are promises that we're going to do if the Republicans have power in the future," Hassett said.

Kudlow, who led the council during Trump's first term, said he had recently discussed capital gains indexing with Trump, who expressed support for the idea. The concept is that only returns above inflation count as profits, so capital gains would be indexed to inflation-meaning lower tax bills for individuals who report gains.

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Proponents argue that the policy, which has been floated by Republicans as far back as President George H.W. Bush, would benefit middle class taxpayers. But the math suggests that the vast majority of the benefits would be enjoyed by the wealthiest Americans.

About two-thirds of all capital gains reported in 2023 came from households with at least $1 million in income, according to IRS data. By comparison, households earning $75,000 to $100,000-the typical American income range-accounted for just over 1% of total capital gains.

That gap has major implications for who would benefit from a new capital gains tax regime.

Last year, Republican Senators Ted Cruz and Thom Tillis introduced legislation that would index capital gains to inflation on assets held for more than three years. The bill was referred to the Committee on Finance, but has yet to receive a vote.

In a statement, Sen. Tillis said that the "bill brings much-needed fairness to the tax system and helps families keep more of what they earn."

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Critics say the policy would provide little benefit to most Americans.

"Most of the benefits would go to the richest 1% and nearly all would go to the richest 20% of taxpayers," Steve Wamhoff, federal policy director at the Institute on Taxation and Economic Policy, wrote in a brief earlier this year.

John Sabelhaus, a senior fellow of economic studies at the Brookings Institution, says the policy relies on "twisted and incomplete logic."

"If we think it's wrong to tax the inflation component of capital gains, then it follows that it's also wrong to let people deduct nominal interest payments, because interest also has an inflation component," Sabelhaus says. "I wonder how many investors would be willing to give up deducting the inflation component of interest (directly or through the firms they own) at their current marginal tax rate so they could benefit from deducting the inflation component of gains at the long-term capital gains rate?"

Put simply, the policy would let investors adjust their profits for inflation while leaving their debts untouched, allowing them to have their cake and eat it too.

Methodology

To calculate the impact of an inflation-adjusted capital gains tax, Barron's used the average net capital gain per return from the IRS Statistics of Income for tax year 2023. The data groups filers into 19 adjusted gross income $(AGI)$ groups. The data does not include filers who did not report capital gains.

Each group was assigned its applicable effective tax rate: 0% below $50,000 of AGI, 15% from $50,000 to $200,000, 18.8% above $200,000 and 23.8% above $500,000. The two highest rates include the 3.8% net investment income tax. We calculated each band's current tax bill by multiplying its average gain by its rate.

We then separated the real gain from the portion attributable to inflation. We assumed a 10.5% nominal annual return and 3.6% annual inflation over a one-year holding period. Under those assumptions, inflation accounts for 34.3% of the nominal gain (3.6 divided by 10.5).

The calculator keeps each band's tax rate constant before and after adjusting for inflation. It does not account for a taxpayer moving into a lower bracket because of the smaller taxable gain.