The core problem is that inflation adjustments apply on both the plus side and the minus side of the ledger. If one excludes the inflationary component of gains while still allowing taxpayers e.g, to deduct the inflationary component of their interest costs, then pervasive tax arbitrages worsen income measurement and will induce pervasive game-playing by wealthy tax avoiders.
In the spirit of the capital gains plan’s idiocy, I was trying to think of what else would be logical by its dim lights. So here’s an idea: In traditional IRAs or other such tax-preferred savings vehicles, you deduct the contribution, but pay tax on the withdrawal. In Roth IRAs and other such alternative tax-preferred savings vehicles, you don’t deduct the contribution, but you exclude the withdrawal.
To a great mind like Steve Mnuchin’s, the lesson should be obvious. Why not combine the best features of each? Create a savings vehicle in which you can make unlimited deductible contributions (a la traditional), and then exclude the withdrawals (a la Roth)!
Better still, Mnuchin can decide to authorize this by Treasury fiat. What’s more, if there are no limits to taxpayer contributions, and no minimum timing periods before tax-free withdrawals are allowed (and why would we want to impede people’s economic planning?), then no one need ever pay income tax again!
Just think how this might hyper-charge our economy in the run-up to November 2020, even with a trade war and ever-rising tariffs on everything.