Inflation and Capital Gains Taxes

A blog about business and economics.
Jan. 30 2012 1:47 PM

Inflation and Capital Gains Taxes

Josh Barro's column bashing the so-called "Buffett Rule" proposal makes an excellent (but largely separate) post about the political economy of failing to index capital gains taxes to inflation:

Let’s say that you bought an asset last year for $100 and sold it today for $104, but there was 2 percent inflation. Your real gain was only $2, but you paid taxes of 60 cents (15 percent of $4), for a real tax rate of 30 percent.

Whether you think 15 percent or 30 percent is the correct rate, the point is that this winds up giving asset owners a strong reason to fear inflation. Absent this distortion, a rich guy sitting on a pile of shares should be indifferent to between 2 percent real growth plus 2 percent inflation and 2 percent real growth plus 3 percent inflation. But under the system of taxing capital gains on the basis of nominal increases in value, an additional percentage point of inflation amounts to a tax increase. And as we all know, rich people are pretty good at lobbying against tax increases. This is probably not an explicit element of Federal Reserve Open Market Committee members' thinking as they continue to plot a course of unduly tight money, but the objective interests of wealthy people tend to have a large influence on policy and this is very plausibly a causal factor in driving tight money.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

What Charles Barkley Gets Wrong About Corporal Punishment and Black Culture

Why Greenland’s “Dark Snow” Should Worry You

Three Talented Actresses in Three Terrible New Shows

Why Do Some People See the Virgin Mary in Grilled Cheese?

The science that explains the human need to find meaning in coincidences.


Happy Constitution Day!

Too bad it’s almost certainly unconstitutional.

Is It Worth Paying Full Price for the iPhone 6 to Keep Your Unlimited Data Plan? We Crunch the Numbers.

What to Do if You Literally Get a Bug in Your Ear

  News & Politics
Sept. 16 2014 7:03 PM Kansas Secretary of State Loses Battle to Protect Senator From Tough Race
Sept. 16 2014 2:35 PM Germany’s Nationwide Ban on Uber Lasted All of Two Weeks
The Vault
Sept. 16 2014 12:15 PM “Human Life Is Frightfully Cheap”: A 1900 Petition to Make Lynching a Federal Offense
  Double X
The XX Factor
Sept. 15 2014 3:31 PM My Year As an Abortion Doula
  Slate Plus
Slate Plus Video
Sept. 16 2014 2:06 PM A Farewell From Emily Bazelon The former senior editor talks about her very first Slate pitch and says goodbye to the magazine.
Brow Beat
Sept. 16 2014 8:43 PM This 17-Minute Tribute to David Fincher Is the Perfect Preparation for Gone Girl
Future Tense
Sept. 16 2014 6:40 PM This iPhone 6 Feature Will Change Weather Forecasting
  Health & Science
Sept. 16 2014 1:39 PM The Case of the Missing Cerebellum How did a Chinese woman live 24 years missing part of her brain?
Sports Nut
Sept. 15 2014 8:41 PM You’re Cut, Adrian Peterson Why fantasy football owners should release the Minnesota Vikings star.