Another Way the Government is Stealing From Us

With the Dow down 50% to 6,900 and back at levels last seen in 1997, it is a perfect time to highlight another way that the Government is stealing from us.

The Government, in an ever-expanding effort to fund its growth and confiscate private property, taxes capital gains. There are numerous reasons why this is a terrible idea in that it punishes savers, investors and risk takers. This tax discourages the actions and activities that produce economic benefit, create jobs and raise living standards.

In what is an unconscionable and grossly incompetent oversight by the US government, capital gains taxes are not indexed for inflation. Anyone with a grasp of basic math understands that inflation erodes the buying power of a dollar. Since 1997 inflation has risen by more than 30%. (As an aside, this is an appalling failure of the Federal Reserve as its defining role is to encourage price stability and preserve the value of the dollar.)

Had you invested in the Dow back in 1997 at 6,900 the value of your holdings on a dollar denominated basis would not have changed. Yet the real value of those dollars would have declined by in excess of 30%. The government, whose job it is to preserve the value of those dollars, seems blissfully unaware of this phenomenon.

Now imagine that you had started a company or purchased a stock in 1997 and the value of that investment had risen by 30% over the last 12 years. In real terms, the increase in value would have only offset the corresponding rise in prices. You have made no profit but have successfully preserved the value of your investment. But when you sell your investment, the US government arbitrarily decides that you have made a 30% profit. This is absurd and factually in error, but no matter. The government will confiscate its share of your imaginary profits leaving you, the investor, who saved your money and risked your capital, with less value in real terms than you started with 12 years ago.

In real terms, an investor could lose money on an investment yet be required to pay the Government capital gains taxes. Ignoring inflation when calculating taxable capital gains is confiscatory, immoral, discourages savings and punishes risk taking.