NCPA - National Center for Policy Analysis


October 3, 2006

While income tax brackets have been adjusted for the cost of living, capital gains continue to suffer from an inflation tax, which yields a windfall profit for the government but reduces the value of holding long-term capital assets, says the Wall Street Journal.


  • From 1979 to 1994, roughly 33 percent of the increase in shareholder wealth, or some $1.5 trillion, was due to inflation.
  • A 1993 study by then Federal Reserve Board Governor Wayne Angell calculated that the average real tax rate on investments from 1972 to 1992 in NASDAQ stocks was 68 percent; it was 101 percent in the S&P 500, 123 percent in the NYSE, and 233 percent in the Dow Jones Industrials.
  • On three of the four major indexes, the average taxes were higher than the actual return.

Granted, this problem is less severe now than it has been in the past for a number of reasons, including:

  • The hyper-inflation of the 1970s made holding long-term assets particularly costly.
  • The tax has been cut to 15 percent from as high as 28 percent as recently as 1996.

Nevertheless, inflation remains a hidden thief that transfers gains unfairly to the government from taxpayers, says the Journal.  But a bill introduced by House Republicans Mike Pence and Eric Cantor would protect against this by allowing any taxpayer holding an asset for more than three years to have a gain or loss determined by a cost basis adjusted for inflation and immediately raise the after-tax return on capital investment, thus providing an incentive for more of it.

Source: Editorial, "Counting Capital Gains," The Wall Street Journal, October 3, 2006.

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