End the Biden inflation tax

President Trump is reportedly considering new capital gains tax reforms: indexing capital gains for inflation and exempting more home sales from the tax entirely.

Americans, especially young Americans, are rightfully concerned about housing affordability. The Biden administration decimated the American Dream. Reckless spending fueled out-of-control inflation, costly energy mandates drove up the cost of building new homes, and record illegal immigration put pressure on an already scarce housing supply. Unsurprisingly, median home prices surged by 30 percent , and by 2025, the median first-time homebuyer age reached 40 .

At the center of the crisis is a shortage of an estimated nearly 5 million units . Much of this can be attributed to costly regulations that disincentivize new construction, and while policymakers should prioritize deregulation to bring prices down, the effects take time.

Exempting home sales from the capital gains tax entirely would be the quickest way to unlock supply, while providing massive tax relief to homeowners.

Today, the tax code lets single filers exclude up to $250,000 in profit from a home sale, and a married couple can exclude $500,000. Congress enacted these changes in 1997 and has not changed the amounts since. Nearly 30 years later, the median home price has nearly tripled. Today, 34 percent of homeowners could exceed the $250,000 cap, with projections putting that figure at 70 percent by 2035.

That creates a powerful lock-in effect. Since the capital gains tax only triggers when homeowners sell, while holding property until death wipes the gain out entirely through the stepped-up basis, the calculus for them becomes simple: Don’t sell.

The result is family-sized homes sitting off the market, contributing to the housing supply deficit that leaves young Americans locked out of homeownership. The most immediate fix is to raise the exclusion, remove the tax on home sales, and bring these homes back to the market.

Likewise, the proposal to index capital gains for inflation would also prevent individuals from holding onto assets longer than they otherwise would. The result is better allocation of capital, new investment, and more economic growth. But this policy wouldn’t just be a boon to the economy; it also rectifies a grave injustice in our tax system.

Currently, when people sell their home, stock or personal property, they are taxed on the increase in its value. The problem with this calculation is that it ignores the part of the value increase due to inflation. One could even have their asset value lag behind the pace of inflation and still owe capital gains tax. This is purely and simply an inflation tax; Americans are being forced to pay more to the government for price increases that Washington itself caused through irresponsible fiscal and monetary policies.

The burdens of the inflation tax are especially palpable when Americans hold onto assets during periods of high inflation, as we saw under the Biden years, when year-over-year inflation reached a 40-year high of over 9 percent .

The obvious solution to the problem is to index the original purchase price of the asset for inflation, so Americans only pay taxes on real gains. Other parts of our tax code already work this way. The income thresholds for each tax bracket are indexed. The contribution caps for retirement accounts are indexed. Social Security benefits are indexed. It is past time for capital gains to be adjusted for inflation as well.

Critics of any conservative tax policy will undoubtedly rebut these ideas with two objections: that the tax cuts “cost” money by reducing government revenue and that the tax cuts are a giveaway to the rich.

The first criticism does not withstand historical scrutiny or conform to basic economic logic. The government only collects capital gains tax revenue when an individual sells an asset. Thus, high rates and the inflation tax discourage sales and reduce revenue. In 1981, after Congress reduced the maximum long-term capital gains rate from 28 percent to 20 percent, capital gains collections more than doubled in the next four years. Similarly, when the rates were further reduced to 15 percent in 2003, realizations surged 186 percent by 2007.

The second banal talking point overlooks the fact that this policy will provide necessary tax relief to millions of hardworking Americans squeezed most by inflation and who have owned homes for a long period. This is tax relief for the firefighters, teachers and police officers who bought decades ago. In high-cost-of-living blue states like Hawaii and California, where failed housing policies have sent prices soaring, 51 percent and 43 percent of homeowners exceed the current cap. This is not a tax break for the rich.

And this is where the policy comes full circle: every home a longtime owner sells is one a young American family can finally buy.

The Trump administration has undoubtedly begun cleaning up the economic mess it inherited, most notably through the pro-growth tax provisions in the Working Families Tax Cuts . Reforming the capital gains tax is the next logical step.

Ending the inflation tax can accelerate the administration’s economic prosperity agenda by bringing more existing homes back to market, reducing housing costs, and freeing up capital to stimulate growth.

Michael Faulkender is co-chairman of the America First Policy Institute’s Center for American Prosperity. He served as deputy Treasury secretary.