Now that the Congress is looking high and low for money to grab to pay for new programs, the idea of more taxes on capital gains, especially if you can make it look like this just involves the “rich,” is mentioned more often. At first it could seem simple, especially if you are looking from the outside and just want a number to apply a tax rate to. There are cases where people make gigantic amounts in a short time just by chance. But for people like you and me who don’t get by on luck or inside info, our capital gains will be a little more pedestrian and, as I will explain, are often not even gains.
My favorite illustration involves
the Buick LeSabre, a nice American car which I don’t believe is in production
any more. I’ve had a couple of them
myself. But that isn’t where the gain
comes in. Let’s say you bought a piece
of land for $100,000. Perhaps you were
planning to build on it someday. Or
maybe it seemed like a good investment.
Let’s also say it was a few years ago when Buick LeSabres were
cheaper. Just after buying the land, you
happened to look in a newspaper and noticed that Buick LeSabres were on sale
for $10,000 and you thought, “I could have bought ten LeSabres for that same
money.”
Ten or fifteen years goes by. You have paid property taxes and other expenses necessary to hold the land. But now your plans have changed. You decide to sell the land instead of using it. You are pleased to find that land has gone up and you sell for $200,000 giving you a nice fat capital gain of $100,000. The IRS sees things this way too and is ready to apply a 15% haircut to the good news.
But is there a real gain? Let’s say you again pick up a newspaper and notice that Buick Lesabres are now selling for $20,000 and you quickly calculate that you could buy ten of them with the proceeds from the sale, the same number you could have bought when you made the purchase. Where is the gain?
If the transaction is measured in
Buick LeSabres, there is no gain. You
got back just the purchasing power you had before.
What has changed is that the currency has been inflated so that it is worth much less than is was ten or fifteen years before when you made the purchase. A big factor in inflation is the combination of monetary and fiscal policy of the government. They have increased the money supply and picked half the value out of your pocket and they hope you are naïve enough to think you should pay them additional money in the form of capital gains taxes. So when politicians talk about capital gains taxes on the rich, as they are now to pay for medical care and other things, remember this swindle and write them about it.
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