Really what we should do with capital gains is allow people to deduct losses including inflation, so that we tax the total real value gain at the ordinary rate, and do so when the money is actually divested rather than only moved from one investment security to another (because one of the arguments for lower capital gains rates is that higher rates causes money to be locked into securities the investor wouldn't otherwise continue to hold).

Or just use a consumption tax, which is largely the same thing but a lot less complicated.

> what we should do with capital gains is allow people to deduct losses including inflation

Yes, I've come to this conclusion too. The long-standing argument that capital gains rates should be low is about what happens, for example, if your gain on an investment exactly matches inflation: you'd pay taxes on it, but you haven't made any profit in real dollars. The right fix for that is not to divide your paper gain by some amount before taxing it; it's to subtract the loss due to inflation. In times of low inflation, as we have now, this won't make much difference, but if inflation picks up again at some point, it will make quite a large difference.

Of course, such a plan raises the question of exactly what inflation estimator one should use. I'm not enough of an expert to have a strong opinion, but the T-bill rate [0] seems like a reasonable first cut, since it's a good estimator for the risk-free rate of return. Paper gains from holding T-bills would thus not be taxed at all.

Whatever the inflation estimator used, the more important (and likely more controversial) aspect of the proposal is that gains beyond that amount be taxed as ordinary income. The argument is one of simple fairness: once the inflation problem is handled, how can one justify doing otherwise?

[0] https://www.investopedia.com/terms/t/treasurybill.asp -- Okay, I see there isn't just one rate, since the rate depends on the maturity interval, but we can go with the highest one, which is the one for the 52-week bill. This creates the oddity that holders of shorter-term bills will actually get a tax credit, but it will be small; I think we can live with this.

Continuously compounding the prevailing t-bill rate for the holding duration of any asset is doable but sounds like a mess.

You wouldn't want to do it by hand, but it's straightforward to program.

How about tax only on real terms, but on liquidation taxes are retroactively paid as though you bought and sold the asset each year.

This means you don't get an interest free loan from the government to continue to invest in an asset just because you haven't sold yet.

The problem there is that you effectively force liquidation in order to pay the taxes, even if you wouldn't have sold the asset. Not such a problem for index funds, but a big deal for small business owners who would have to sell a stake in their business as soon as it starts doing well in order to pay the tax on its higher current market value, which includes the net present value of expected future profits that haven't yet been realized and so can't be used to pay the tax today.

Having the government give people de facto interest free loans of their own money in order to continue to investing it is also optimal anyway, because the government borrows at an interest rate significantly lower than the average market rate of return. They actually come out ahead by lending the money to investors who are then collecting taxable interest on it, because the tax on the interest can be more than the rate the government pays to issue bonds in the meantime, not even counting the overall economic benefit of stimulating investment (i.e. more/better jobs for people who are themselves paying taxes).

I'm saying that you do the calculations retroactively on sale. No taxes are due until then. Even if the asset spikes, no taxes are due if ultimately sold at a loss.

Dont tariffs on imports\exports make this not true? Or is simply true enough?

Those are also a tax; if you import a million dollars of something subject to a 10% tariff, you pay 100k to the government for the privilege.

One thing that complicates the above is that the US does tend to run a larger deficit than Canada.