The Treasury tax reform proposal would allow the owner of an asset such as corporate stock or a dwelling to reduce any gain when the asset is sold by the amount of inflation that had occurred since it was purchased.
No such adjustment is allowed now; instead, 60 percent of the gain is excluded from the seller's gross income and the remaining 40 percent is taxed like any other form of income. With the current top tax rate of 50 percent, the maximum rate on capital gains is usually 20 percent (40 percent of the gain taxed at a 50 percent rate).
Under the Treasury proposal, the top tax rate would fall to 35 percent but all of the gain -- not just 40 percent of it -- would be included in gross income. Whether the tax bite on a gain would be larger or smaller than under current law would depend on how long an asset was held and how much the general price level rose during that period.
Suppose that the value of an asset owned by someone paying the top tax rate had doubled. The table relates average inflation rates during the period since the asset was purchased with the point at which the tax would be lower under the Treasury proposal than under current law. For assets currently held, the adjustment for inflation would go back either to 1965 or the date the asset was acquired, whichever was earlier.
Since 1967, the consumer price index has more than tripled. That means that, under the Treasury proposal, an asset bought that year could be sold for more than three times its cost, and there would be no taxable gain. Under current law, more than one-fourth of the selling price would be a taxable gain.
Assets held at the time the Treasury proposal became law would be taxed under the current system through 1988. The new treatment would begin for those assets in 1989.