> Capital gains are not inflation-indexed, which is one reason to have a lower rate.

No, it's a good reason to inflation adjust them; not inflation adjusting them and charging a lower rate means that people who can regularly turn over capital so that there is often very little inflation effect (more common with the really rich) pay low real taxes on income, while people who have a few capital assets that are held a long time for use value and then sell them with little real (but much inflationary) appreciation pay taxes at low rate on the nominal income, but often at a high rate on any real income (or, worse, pay positive taxes with no or negative real income). The two features compound the pro-wealth bias in capital gains policy rather than offsetting to approximate fairness with taxation of other income.

Taxes on income should be blind as to whether it is labor or capital income (including those characterized as “payroll” rather than “income” taxes), and, to smooth irregular income streams (which otherwise have undesirable consequences in a progressive tax system) generous allowances for deferment or unusually high income and advance recognition of income should be made, and basis values, and deferred and advance-recognized income amounts all should be inflation adjusted.

I completely agree that we should inflation-index assets for which electronic purchase/sale records readily available (stock purchased through brokerages). For other types of assets, the inflation rationale is still a decent reason to have a lower LTCG rate (think antiques, paintings, etc.).

> I completely agree that we should inflation-index assets for which electronic purchase/sale records readily available (stock purchased through brokerages).

How are electronic records relevant? The information needed is expected, whether records or electronic or not, when doing capital gains now, so there's non rational need for electronic records.

> For other types of assets, the inflation rationale is still a decent reason to have a lower LTCG rate

No, it's not. For the reasons already explained.

How do you prove how long you've held an asset, so the appropriate inflation adjustment can be done?

> How do you prove how long you've held an asset, so the appropriate inflation adjustment can be done?

The same way you prove cost basis; if you have adequate records of one, you’ll pretty invariably have both.

Perhaps in the modern era, but less so in the past. The IRS also has a workaround if you can't prove your tax basis, which is to consider it all gains. That's a reasonable fallback for calculating gains, because if you don't have proof of basis, it's likely to be an older acquisition (and one which is more highly appreciated.) But the opposite is true for inflation adjusting, which would leave people with no records to be considered to have zero tax basis (all gains) and no inflation adjustment.

> Perhaps in the modern era, but less so in the past. The IRS also has a workaround if you can't prove your tax basis, which is to consider it all gains. That's a reasonable fallback for calculating gains, because if you don't have proof of basis, it's likely to be an older acquisition (and one which is more highly appreciated.) But the opposite is true for inflation adjusting, which would leave people with no records to be considered to have zero tax basis (all gains) and no inflation adjustment.

If lacking transfer documents makes the sale value “all gains”, then the inflation adjustment is irrelevant, since you are adjusting a zero basis value, which is still going to be zero if you do or don't adjust it for inflation, no matter what a amount of inflation has occurred.

The only place where there is even a theoretical problem is where there is proof of basis value but not basis date; this seems extremely improbable to occur in practice.

Don’t you already have to have a record of the cost basis of the asset to calculate capital gains?

So you already need a receipt or some record with the original purchase price, which probably has a time stamp on it.

Well you also need some paperwork to prove your cost basis, and most of that paperwork is dated.

But yeah this is one reason why collectibles have a special, higher LTCG rate than securities.

disagree with both the points (inflation indexing & double taxation). when vast majority of the other income is for regular people is not 'corrected' for inflation then there no reason to do it just for investments. this produces a systematic tilting towards 'invested money' & over long periods that gives them huge advantage (e.g.. last 40 years). inflation is an emergent property of the monetary system we have, giving one group of people protection from it just puts thumb on the scale for them.

Double taxation is a standard BS argument too, the whole point of taxation is that govt 'deserves' a cut of the transaction for providing a safe stable environment for economic activity. this whole notion that the moment you got yours, no-one is allowed to touch it anymore is BS, its true for other activities we engage in like sales tax & getting help then why should value gained in stock market be absolved from it?

any activity that we choose to tax less is essentially being promoted so its no wonder that after financial crisis (& even now) most of the 'new money' went back in stock market instead of the real economy. this needs to end. if anything cr*p like HFT should be taxed more to ensure there is less incentive for that kind of skimming over the top.

> vast majority of the other income is for regular people is not 'corrected' for inflation then there no reason to do it just for investments

The vast majority of other income is taxed in the year it is earned, so there is no/minimal inflation.

> if anything cr-p like HFT should be taxed more to ensure there is less incentive for that kind of skimming over the top.

Gains from HFT would not be LTCG (held less than a year), so it would be taxed at ordinary income rates.

> The vast majority of other income is taxed in the year it is earned, so there is no/minimal inflation.

but our annual raise are often in line with inflation should they be excluded? what about sales tax, thats directly effected by prices going up, should that be excluded to. and what about the receivers of these payment, its the hotdog I paid for is taxed already then why should the vendor have to pay tax again? there is no end to it. this whole distinction of earned & 'gained' income is farce and created just to favor wealthy class. I home more 'commoners' see that.

> Gains from HFT would not be LTCG (held less than a year), so it would be taxed at ordinary income rates.

that may be, but my argument is that it should be taxed higher not lower for discouraging the activity. and what about the hedge funds clients that primarily benefit from HFT, should they have tax breaks for holding that capital in fund for long term?

> but our annual raise are often in line with inflation should they be excluded?

This misunderstands the point of indexing gains for inflation, or applying a lower rate to income that is mixed with inflation. The point is that you pay tax on the income in the year it is earned (or soon thereafter). It doesn't matter what the money was earned for, whether you got a raise, or anything else. The point is that it's all money that you just got right now. It's different when you are taxed on a mix of "real" gains (in the economic sense) and inflation.

> The point is that it's all money that you just got right now.

That's less true if you have hyperinflation, but at normal inflation rates ignoring inflation across the tax year is a pragmatic simplification with modest effect for gains that aren't long-term in nature (which may not exactly coincide with all income not subject to favorable taxation as LTCG.)

No you are misunderstanding my core point, the 'Inflation' is just a colloquial term we have coined for prices generally rising for many reasons some of which may be related new money being created because of money printing & Fed lending window. it just effects different sectors differently, so a TV may not go up so much but medicine goes up a lot. inflation is just average measure of that. if you provide protection from that to one type of gains then you are essentially telling society to go pile up in that & guess whats been happening lately.

"Double taxation"

For such an in depth example you really missed this.

I make $100,000 in year X. That covers two brackets, and my effective rate is, say, 25% federal.

SO I have 75k left over.

I invest 5k.

It doubles to 10k.

I'm then taxed on the 5k I earned. Not the 5k I invested.

But do go on about double taxation.

> For such an in depth example you really missed this.

Like many HNers, I'm on here in my spare time, while not running my startup or caring for my kids. Please forgive my not including every argument and counter-argument here.

But to reply, if you bought stock on the stock market, then yeah that is double taxed because the corporation also pays tax on their corporate income. We could get into that whole can of worms, but it's frankly too complex and off-topic. The point of my post was to show some common arguments and counter-arguments.

Yes, and if you buy a can of Coke at the store with the proceeds of the sale, you're then triple taxed when you pay sales tax, and then the business owner is quadruple-taxed when he books some part of it as a profit, just like his supplier is quintuple-taxed when he is paid by store owner for the Coke supply, and so on, and so on.

Clearly, this is absurd: it is universally recognized that transactions often create tax events. There's no "double taxation" rule that doesn't allow "the same money" to be taxed twice, it's just we don't tax the same transaction twice.

The claim is that the thing you invested in doesn't magically double in value. It goes up in value because of other post-tax economic activity.

If you went to a roulette table at a casino, put $5K on black and it hit, you'd owe tax on that $5K because it's just income.

If you bought a company for $5K and then sold it a year later for $10K, its value typically increased because it was doing more business and therefore paying more taxes along the way.

Now, there are of course problems with this. Companies aren't purely valued on post-tax activities. In the event of real estate, it's even less convincing. If a vacation house doubles in value, it's unlikely this was due to the house's post-tax economic activity. So whether or not it's a double taxation is debatable but kind of irrelevant; it's remains a relatively fair way to raise revenue.

Do go on? Sure!

Read this: https://www.thebigquestions.com/2010/01/27/a-quick-economics...

Chug! Chug! Chug!

(the kool-aid)

That author had to jump through so many hoops to make an argument his chiropractor must be rich. Seriously, that entire article was nonsense from top to bottom.

I was with you right up to

"• Capital gains is "double taxation". It is true that if you tax capital, that is likely post-tax money. That is, it was earned at some time in the past and tax was paid at that time."

The "double taxation" argument is false, since it assumes that the entity paying the original tax and the entity paying the second tax are the same entity which is manifestly false. It is also malicious, since it is usually applied to dividends and in so doing converts the investment markets to a zero-sum game.

I don't think you could say CG taxes are "double taxation" since only the income from the asset is taxed, not the principle.

>it's much less than that because of inflation

Why would you hold an investment for 55 years that isn't beating inflation?

> Why would you hold an investment for 55 years that isn't beating inflation?

The point is that the inflation is getting taxed also. Say inflation is at 2 percent per year over the period, and it's appreciating at 2 percent more than that annually. Then when you pay taxes, the "capital gain" amount includes both the real appreciation and the inflation. So in this example, half of the putative "gain" is actually inflation.

>So in this example, half of the putative "gain" is actually inflation.

Is this an issue in practice? Like I get if I have an asset that meets inflation for a decade than I'll lose value through the taxation. But that would be a bad investment, wouldn't it?

Yes, plenty of people have assets that don't appreciate a ton over a long period of time. Even with stock — you don't know in January if it's going to be worth more in December. So you make some calculation and sometimes end up holding it. Also, people hold onto things for sentimental reasons (inherited from relatives, etc.). But the bottom line is that anyone who holds any asset for 20 years and then sells it is going to pay tax on the inflation that occurred during that period.