> Should the calculation of capital gains take inflation into account?

There is a good argument that capital gains, for fairness, should be taxed the same as other income, on a value calculated by adjusting the basis value for inflation. (Which is very different from maintaining current policy but for adjusting basis value.)

But fairness doesn’t seem to be a motivating principle of the existing capital gains tax in the first place. If you look at it as an effort to encourage the shortest possible “long-term” holding, the existing policy makes perfect sense.

He has a point. Imagine capital gains in a sustained high inflation period. Even if your investment exactly tracked inflation you’d end up with a very substantial nominal gain, and LTCG uses the nominal value.

I don't understand the point since he'd still be better off than if he just held cash. What am I missing?

Think of it this way, they could have bought something for $10,000 at the beginning but now that $10,000 item would cost $15,700 and they only have about $13,810 or less depending on state tax. (That assumes a 23.8% tax rate on the $5000 in “gains”)

So assuming whatever they bought doesn’t degrade, it would have been better to buy it in the beginning rather than invest and make less than inflation after tax

We will not have to image that, it coming sooner than most people think

It would be great for the taxpayer if you could do that but the government would lose out on so much revenue. So I think any such proposal is dead on arrival.

I think it’s important to recognize that taxes are not primarily about revenue. The government can just create/inflate as much money into existence as it wants. All taxes are about behavior control and signaling. We’re either trying to discourage a behavior or signal we’re sticking it to some group or other who is getting taxed. Once you see the world through this lens all of these tax laws make much more sense.

It is also part of fiscal/monetary policy. Sure, the government could increase the money supply. but if the amount of spending they want to do is greater than the amount they want to increase the money supply by, they need some way to reconcile the two, which taxes provide.

Federal Government, maybe. But State and Local do not have this option.

I think it is important to recognize that taxes when used for anything other then revenue are highly unethical and should be opposed by the population

I feel like they're one of the only tools we have collectively as a society to counteract "tragedy of the commons"/negative externality situations. Is a tax that brings the financial costs of an action in line with its distributed societal costs that unethical?

Almost no taxes are based on negative externalities.

I'd love it if that changes, but productive activity is primarily what's taxed, unfortunately.

Government taxation is very very ineffective tool, and rarely accomplishes that goal. I would love for you to cite and example of a taxation scheme in use today that is right now countering an actual negative externality

Governments do not have a track record for being trust worthily enough to be placed in charge of controlling externalities, it would inevitably be used to usurp power, and liberty from the people, while unjustly enriching their political allies. This happens time and time again yet people still believe government is not only the "best" way to control things, but more stockily believe it is the "only" way to do so despite 1000's of years of historical record proving otherwise

Singapore has high taxes on cars to reduce congestion. People stopped driving.

Germany has high taxes on gasoline. People buy more efficient cars.

Norway has taxes on ICEs but no taxes on EVs. Lots of people buy EVs.

Land value taxes reduce the economic loss caused by rent seeking.

Carbon taxes reduce CO2 emissions.

>This happens time and time again yet people still believe government is not only the "best" way to control things, but more stockily believe it is the "only" way to do so despite 1000's of years of historical record proving otherwise

Who cares about the last 1000 years of historical record when the necessity of government activity only depends on the current state of the economy? There are barely any absolutes in economics, almost everything depends on the situation in question.

What are alternatives to controlling negative externalities? My understanding is that they are by definition not fixable by the free market, and anything that is not the free market is government essentially.

privatise everything so that the owners are able to sue those who negatively impact their assets

https://www.washingtonexaminer.com/if-you-want-to-save-the-e...

That didn't work for pigs and chicken.

How would that work for air pollution?

In theory by owning a certain part of the atmosphere above your country. The government would then set a maximum CO2 limit in ppm that is allowed on your cubic metres of atmosphere.

In practice it is heavily simplified and you don't get to own portions of the atmosphere, instead you get usage rights, which means the right to pollute a certain amount. This is done via cap and trade already.

How would suing them work?

How does that get around the free rider problem? If someone is polluting the air, they're making everyone's life worse by epsilon. If I'm to sue them, all the cost of the lawsuit is privatized, and all the benefit is socialized

As opposed to the current system where they still pollute, they still kill you, but you're not even allowed to sue because the state owns the air/water and lets them pollute and you get no compensation.

It's a good point that the air being fully public leads to a tragedy of the commons situation.

Either way, we're asking a lot of the comperence of the system. If the air were privatized we'd still need a legal system that isn't corrupted by special interests. Since it'd still be (I'm assuming) a representative democratic process that creates that system, corporatism is still possible. Thoughts?

I've always seen a pollution tax as a Libertarian friendly solution to air pollution. A libertarian system needs to raise some tax money, so isn't it better that all tax money comes from a tax on externalities ? If we don't tax externalities then aren't we left to tax productive activity which is even worse?

The only way it would be remotely libertarian would be if you upended the entire tax system and replaced it with Single Tax system aka Geo-Libertarianism...

But that is not in the cards, and no one is proposing that, they want to ADD these externality based taxation ON TOP of the tax on productivity

I agree that in practice it's largely a ploy to get more revenue to the state.

But at the same time, the tax itself seems to follow from a first principles examination of Libertarian axioms.

Negative externalities can be seen as a violation of the Non-Aggression Principle. The role of the state in a Libertarian framework is to protect individuals from such unwanted force by enacting force onto the aggressor. An externality tax would be one practical way to achieve that, and therefore seems wholly consistent with the Libertarian view.

I would add the externality tax funds should be given directly to the harmed population. Those funds going into the general tax ledger fails to compensate the harmed.

I mostly agree with that, except for two edge cases:

(1) If the externality tax is used to raise funds for basics such as the police, then it's the lesser evil to have it go to the general ledger. Where else would public funds be raised to fund these basics?

(2) In the rare case that the externality is so broad, it can go to the general ledger, such as with carbon pollution (to the extent that it's harmful). Trying to figure out who is harmed and by how much is itself a bureucratic and potentially wasteful process that can be coopted by government corruption, so we should be weary of that.

>> first principles examination of Libertarian axioms.

First principles of libertarian axiom is not the Non-Aggression Principle as many believe, in fact there are some serious flaws with that [1], libertarianism is more accurately stated as having a foundational principle of Self Ownership [2], from this the non-aggression principle can be derived however like with many other things non-aggression can not be viewed as an absolute, if it is then every breath you exhale is an act of aggression....

[1] https://www.libertarianism.org/blog/six-reasons-libertarians...

[2] https://www.youtube.com/watch?v=M9srplWe_QQ

>> The role of the state in a Libertarian framework is to protect individuals from such unwanted force by enacting force onto the aggressor.

That is an extreme over simplification of what a libertarian framework is, and stated in the way you have could betray the libertarian principles as it seems to have with in it a justification for the initiation of violence, something that would counter the libertarian ideology

Suppose for argument's sake that climate change is both significantly driven by humans and that it poses a real and grave risk.

What would be the Libertarian solution to that, and what would be its justification?

I've heard Yaron Brooks, who I usually agree with, on this topic but he seems to downplay negative externalities, which I view as a non-starter, given that they clearly exist and in some cases are large in magnitude (e.g. dumping of chemicals in a river).

  >  serious flaws with that [1]

I've read this before and agree with it.

  >  That is an extreme over simplification

Is it an over simplification of minarchist-libertarians, though?

What state apparatus do they want? Police, courts, etc. These all have the purpose of protecting individual A from individual B by using force (arrest, prison, fines, etc) on individual B if they commit violence/fraud/etc against A.

I perhaps shouldn't have used the word "Libertarian" for that though since that's a broader category.

Isn't that the same way it works for buying stocks?

I don't live in the US, but if I buy stocks for 100$, then sell them five years later for 150$, I have to pay a percentage of the winnings (so a % of 50$). This means that if inflation was more than what's left over after the taxes are removed then I would effectively "lose" money.

Let's be clear though, if your stock grows as little as that such that after paying capital gains on profits and adding inflation into the equation would leave you on the negative or even, then it's a pretty bad performing stock.

Why? What if I buy stocks with the intention of preservinpreserving wealth rather than growing my net worth? In such a case I am just trying to keep up with inflation with as little risk as possible, but the tax policies in place are forcing me to take on more risk. I can't just take a stake in a basket of goods and call it a day. I have to beat the risk free market substantially.

Assuming 5% inflation with 0% returns for 50 years and a 20% capital gains tax $1 turns into $11.47, a rise by $10.47, therefore you owe $2.09 in taxes. $11.47-$2.09 = $9.37.

You rightfully expect $11.47 but you instead get $9.37 after taxes. Your wealth has shrunk to 81.6% of its original value, meaning you need to net a return of 22.4% over 50 years to break even, which is equivalent to a 0.4% gain every single year or a 0.4% loss every single year.

If you could find a 4.7% interest savings account you would beat the perfect savings vehicle.

In practice inflation is laughably low right now. With current inflation (2.5% yes it's an overestimate) you would lose 14% of your savings over 50 years.

You're right that this is forcing you to take on more risk, but not substantially. You may need to put 10% of your money into the least risky stocks and keep 90% in a risk free asset.

With that return your risk may be 0 but a guaranteed loss is what you choose. If you want to preserve wealth and want to beat inflation go with mutual or index funds, they go up and down with the market and the market beats inflation and appreciate quite a bit more. Or bonds.

All of those are what I had in mind. All of those incur capital gains tax, with the exception of perhaps some govt bonds (which have low yields).

Specifically, look out for funds that specialize in low volatility. Their gains are lower but so is the risk.

Yes, he was in fact talking about stocks.

Yes, he has a point. Just treading water with respect to inflation triggers a tax bill. I doubt the cap gains calculation will ever tax real gains rather than nominal gains.

If you had 10k in 2000 then didn't invest, in 2021, you'd lose even more money due to inflation than if you invested.

Because cash obviously doesn't grow with inflation. You're only option to "get ahead" is to pick a better stock :)

Also there is always the standard deduction, and I think at the federal level there is even 30k on top of that you can take in LTCG without any taxes. So not a luxurious lifestyle, but certainly enough to survive.

I don't think WA is doing that though. They probably have a much lower threshold when the capital gains tax sets in.

Edit: just read a bit closer and WA is exempting the first 250k in gains per year. So they are offering an even better deal than the feds.

In the current economic climate the US is in? Nope.

In Turkey? Absolutely.

US has too much savings and there is strong pressure to get rid of the excess savings.

Turkey has the exact opposite problem, people stop saving in Turkey and they need as many incentives as possible.

That is only likely to happen with housing (although not for the past 30 years in anywhere remotely desirable), and the tax breaks on moving your primary residence pretty much address that.

> Should the calculation of capital gains take inflation into account?

Isn't this one of the justifications for cap gains rates typically (jurisdiction dependent) being lower than regular income?

Not that I've ever heard. The only justification I've heard is that long-term investing is good for the overall economy, and therefore should be encouraged.

I could swear I've heard it brought up but I'm not on top of these discussions, so who knows.

And as reduced down, it essentially gives the Fed the ability to seize 20% (soon to be 40%) of all property in the name of the IRS, by printing arbitrary amounts of money (which the Fed board can do independently of congress) to blow up the nominal "capital gains" on any asset, triggering capital gains tax.

It hasn't been an issue historically, in an era of hawkish fed leadership, but this year... we'll see.

What you're describing is a wealth tax, not capital gains. Capital gains taxes are applied to gains on capital, not to held property.

That's the point! Inflation causes fake capital gains on held property, which then turns into a wealth tax if you ever try to exchange the asset for another one!

It does not turn into a wealth tax. A wealth tax is a tax on the entire value of the property. A capital gains tax is a tax on the gains. The only, extremely narrow situation in which they’re the same for a particular investment is when someone has a $0 cost basis on their investment. Runaway high inflation will have them trend closer to one another, but we don’t have that.

The "runaway high inflation" is exactly what I'm saying is a possibility. But it's not even necessary.

Capital gains is a LOT compared to any proposed wealth tax, _and_ it affects most people (as opposed to the "billionaire tax"). 2x inflation (which is very plausible over a decade) translates into a 10% wealth tax, even at 20% cap gains. 4x inflation is 15%. Those are real numbers!

2x inflation over 10 years would require something like 7.2% annualized inflation. We're nowhere near that and haven't been for decades. Average over the last 20 years is around 3%, and it's been even lower over the past decade.

4x requires historically high inflation over a decade.

It's also unlike a wealth tax in the sense that you are not approaching a legislated minimum. If there is 1000x inflation you still only lose the capital gains taxes. If the government introduces a 5% wealth tax you lose everything after 100 years.

Those ARE real numbers - though we may disagree on how likely those levels of inflation are. Does higher inflation increase capital gains tax bills? Yes, we'll agree on that. Do capital gains impact more people than any proposed wealth tax I've seen? Also, yes we'll agree there too.

However, one fundamental difference between capital gains taxes and wealth taxes is that capital gains taxes are only imposed on the gains on the disposition of an asset, whereas a wealth tax is applied to an individual's entire net worth, and all proposals I've seen are applied annually. This is relevant to the original comment that said "all property" would be subject to a 20% tax - but my point was that's not the case, regardless of inflation.

Bingo. Your comment likely won't gain traction here, but it is definitely going to be an interesting decade!

Absolutely. But really there should not be capital gains tax as it is double taxation - you have already paid income tax on the same dollar.

"Double taxation" as a concept is complete nonsense. You pay sales tax, property tax, VAT, etc out of money (or assets bought with money) that has already been subject to your income tax. You pay both federal and local income taxes on the same money. Tax systems are naturally layered, and have been since the beginning of civilization.

There are good arguments against capital gains tax, but this is not one of them.

Double taxation is more about how if if I own a c corp it pays a tax on profits, and then distributes that remainder of that profit to me and I pay the dividend tax on the same money. Thus the corp tax + the dividend tax should be close to the individual tax rate. When they aren't, you are tax advantaged to run an s corp.

Double taxation increases tax complexity. If possible we limit ourselves to as few taxes as possible but make those we keep count.

I don’t think you understand how capital gains work...

If you invest a dollar today and get ten dollars tomorrow you’ve gained 9 dollars. When were you taxed for that?

They're saying if that growth occured over 60 years then you've just kept up with inflation. Might as well have just put it in a standard savings account and NOT get capital gains tax. *Well, maybe a standard money market account or bond.

Bonds also incur capital gains tax) The point of the capital gains taxes/inflation is specifically to incentivize people spending money over saving (if too many people saved money the economy would contract). It's not a perfect tool, but it works somewhat.

Income from bonds issued by the federal government and its agencies, including Treasury securities, is generally exempt from state and local taxes.

Wait, wouldn't you get taxed capital gains on a standard savings account? I'm genuinely curious even though right now saving accounts are not saving anything at all.

Tax on interest is at a different rate than capital gains tax.

Which one is higher?

I’m pretty sure that interest income is taxed, at the federal level, like wage income. In other words, at a higher rate than capital gains.

Long-term capital gains are taxed at a lower rate than ordinary income and short-term capital gains (which are taxed at income rates).

Earned interest is taxed as income at the federal level.

Oh, I know. Should it be taxed at the state level too?

I think his point was the initial dollar you invested was at some point subject to income tax to get it.

The (now gray) comment talks about being double taxed. That is, taxed twice for the same money.

If I invest $100 (post-tax money) and sell the investment at $1000, I do not pay taxes on that $100. There is no double taxing. I do pay taxes on the $900 gain.

The double taxation that some people talk about is actually corporate profits being taxed, and then that money being further taxed as capital gains / dividends - but I don't think that 's a fair criticism either.

The problem is the gain may exist in nominal terms only. It’s possible to make a 100% nominal gain, which will be taxed, even if in inflation adjusted terms you lost 90% of the actual value in the process.

Yes, but the capital gains tax doesn't apply to that dollar (it's right in the name).

There is no double taxation here.

There is a more nuanced question as to whether or not inflation should be incorporated into the calculations, but there are pros and cons there also.

That’s a bad point, because the first dollar won’t be subject to cap gains, so there is no double taxation happening.

You pay capital gains on the nominal profit (versus real profit, which may actually be a real loss as in the example). You have not paid double the taxes unless you screwed up and selected a cost-basis of $0 versus the actual non-zero value.

Please read up on the difference between 'profit' and 'revenue'.