Earlier this month, a host of Republican lawmakers, led by Texas Sen. Ted Cruz and South Carolina Sen. Tim Scott, sent letters to Treasury Secretary Scott Bessent urging an executive action to index the agency’s calculation of capital gains taxes to inflation. The change would lower taxable capital gains through an adjustment of the cost basis of an asset to account for inflation. 

The Committee for a Responsible Federal Budget, a Washington-based fiscal watchdog, warned in a report published on Tuesday that the executive action would slash tax revenue, heaping an additional $170 to $950 billion onto the national debt by 2035, citing data from the Yale Budget Lab.

“The last thing we need is more deficit-financed tax cuts—especially ones enacted by executive fiat,” CRFB president Maya MacGuineas said in a statement. “With debt approaching record levels and interest expenses exceeding $1 trillion a year, we need more revenue, not less.”

Republican lawmakers have advocated for tax breaks on the basis that individuals having more money in their pockets can be used to increasing spending, productivity, and economic growth. Efforts to cut taxes through capital gains indexation have been going on for years, including during President Donald Trump’s first administration, when Cruz introduced a bill in 2018 calling for then-Treasury Secretary Steven Mnuchin to change regulations around indexing capital gains. Proponents argue adjusting capital gains for inflation prevents investors’ “phantom” gains from being taxed, and that taxing investments should be curtailed to incentivize injecting more money into the economy. 

The winners of capital gains indexation

Investors also have a lot more to gain from indexation today. The Yale Budget Lab noted that in 2018 when legislation around capital gains tax cuts was introduced, the Congressional Budget Office projected $9.5 trillion in taxable capital gains realizations over a ten-year period. Today’s projection has nearly doubled to about $16.5 trillion, driven by the S&P 500 being nearly twice its 2018 value and after years of low pre-pandemic inflation that suppressed cost-basis adjustments. 

These investors also skew wealthy, with more than 90% of stocks owned by the richest 10% of Americans, according to Federal Reserve data. As a result, tax cuts through capital gains indexation are regressive, benefiting the top tier in the K-shaped economy of the rich getting richer as lower-income Americans continue to struggle. The Yale Budget Lab found the top 0.1% by income would see about $350,000 in tax savings from 2026 to 2027, but the bottom two quintiles of income would see no benefit at all.

The drawbacks of the proposed executive action

According to CRFB, the juice isn’t worth the squeeze for the broader economy. The national debt is growing by about $2 trillion per year, with an additional $1 trillion spent on paying interest on that debt. The watchdog said in a report earlier this month that in the next five years, interest on the national debt will exceed GDP growth, hurtling the U.S. into a “debt spiral.” That risk grows as interest rates remain high, making it harder to make a dent in repaying the balance.

Tax revenue is even more crucial following the Supreme Court decision to strike down tariffs imposed under the International Emergency Economic Powers Act, which would have generated $1.7 trillion in revenue through 2036, CRFB argued. 

Elena Patel, co-director of the Urban-Brookings Tax Policy Center, said another argument against indexing capital gains is that while assets would be adjusted for inflation, liabilities and debt would not be. This means an investor could borrow money, deduct nominal interest payments, and invest in an asset with gains indexed to inflation: something that benefits borrowers at the expense of the tax base. 

The one-sided adjustment would be a particular burden on homeowners, most of whom do not pay capital gains tax anyways as a result of existing tax exemptions. A policy indexing capital gains would therefore not be beneficial to the 12 million homeowners taking advantage of this benefit, Patel told Fortune.  

“As a homeowner, I don’t want that, because that means my deduction is eroding over time and worth less and less,” she said.