Inflation and Capital Gains Taxes, 4/21
Something for investors to worry about
In Peter Thiel’s rabble-rousing speech at the Bitcoin conference, he makes a point that I have been making about how capital gains taxes interact with inflation. If you buy a stock at $100 and sell it in a year for $200, 20 percent of that $100 gain is taxable. That is true even if all of that gain reflects general inflation, meaning that your purchasing power of $200 when you sell is no higher than the purchasing power of $100 when you bought.
One way to defend yourself is to not sell the stock. As the laws exist today, you are not taxed until you sell. Instead of selling, you could borrow against the stock. And as the laws exist today, you could leave the stock to your heirs, who will not have to pay capital gains tax on it.
But if you own a mutual fund that enjoys a capital gain, you do not have a choice to defer that gain for tax purposes. Mutual funds are required by law to distribute gains to shareholders.
I don’t mind getting capital gains distributions in a non-taxable retirement account. But if the mutual fund is in a taxable account, I would rather not receive a capital gains distribution.
My understanding is that ETFs are less likely to generate capital gains distributions than are ordinary mutual funds. So ETFs may dominate mutual funds as investment vehicles in taxable accounts. But in a high-inflation environment, perhaps even ETFs will find it more difficult to avoid realizing capital gains. If so, then buying the stocks yourself might be better for tax purposes than buying an ETF. But only a tax advisor would know for sure, and I am not one of those.
Note that this year the Democrats floated the idea of taxing capital gains that have not yet been realized. So if the stock you bought a year ago for $100 is now worth $200, you have to pay capital gains, even if you do not sell it. At today’s inflation rate, if a tax on unrealized gains were adopted, investors would be in a world of pain. I would expect a massive shift away from equities into tax-advantaged investments, such as government-issued securities.
Re: "if a tax on unrealized gains were adopted, investors would be in a world of pain. I would expect a massive shift away from equities into tax-advantaged investments, such as government-issued securities."
Indeed, and might be exactly the intent of some of the people behind the recent spendathons, as such a flight would partially disguise the debt-service costs that might otherwise cramp their desires for even more expansive and expensive government.
I used to oppose, but now support, taxing unrealized capital gains, but only after some threshold. $500k was good for houses when the median before tax income was $50k. I would support something like it, at about 10 times the prior year's median wage, so it goes up each year with wages (or not??)
The % increase in wealth for the top 10%, or top 1%, should be less than the increase in the median wage (50%) - a criteria which has NOT been met nor even attempted. Joel Kotkin noted: "California also suffers the widest gap between middle- and upper-middle-income earners of any state."
This linked to an article looking at the top 75% vs 50% as the "wage gap" between the upper middle and the middle.
"Last year’s upper crust wages ran 72% greater than the median in California,"
The article was very forthcoming with numbers:
"it’s median wage was 10th highest nationally at $42,430, by this pay measurement."
This CA median was lower than the national median, but it's 75th % was high, as
"the sixth-highest wage last year — $73,110 — at the 75th percentile. That’s a significant premium to the 50-state median of $58,805"
The 2019 article notes CA is not alone:
"This wage gap ranks larger in the 20 states that did not support President Trump in the 2016 election. Blue states in 2018 averaged a 61% median-to-75th-percentile gap vs. 55% in the 30 red states."
Now that many of the rich want to promote lies and oppose free speech against those lies, I'm getting on board the "tax the rich, more" train. I remain on the "smaller gov't" train, but realize that most voters choose, and vote for, the Bigger gov't benefit (+ higher tax) over less gov't benefit and less tax. Significant thanks to the rich supported indoctrination about how gov't benefits are morally superior to individual responsibility.
Reps, if they ever win again in elections where Dem deep state administrators are allowed to cheat, should use levers of State Capacity to increase the incentives to those who work for less than the median, so as to have them make more.
Better metrics are also good. The 75% - 50% "wage gap" is better than Gini, but I'd prefer a 90%-50%, or 1%-50%. It would be nice for some public intellectual to be talking more clearly and persuasively over what metrics are better to measure, and why.
Bryan Caplan's list (prior: https://betonit.substack.com/p/what-the-hell-is-going-on-with-the?s=r)
didn't include income inequality, but was pretty good:
Core Inflation Rate
LFP (Labor Force Participation - already much better than unemployment) plus
LFP - prime age, and LFP - 65+
US Money Supply (M0 - we're all supposed to know M1 & M2 different definitions)
Apr 7, Richard Hanania wrote about being on substack: