COUNTING CAPITAL GAINS
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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