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Tax Deduction for Inflation

If you didn't get a raise, don't worry about it.
(+3, -3)
  [vote for,

Let's say I've worked all my life, and I'm retiring with 1,000,000 in income-producing investments. And the interest is my only source of income. I've got it all in CD's at 5% and I'm tryin to live on just the interest, not diminishing the principle.

So each April I'm taxed on the whole 50000, even though my real world earnings are only 20000 or 5%-3%(average inflation level). If I kept the million in cash, I should be able to write off a 30000 (or inflation indexed percentage) loss each year. Why would we want to tax each other on earnings that only go toward maintaining the value of our liquid assets?

The estimated tax on 50000 in interest is 7000. On 20000 it's 1500. If I earned just 3% on my money, and inflation was 3%, that 30000 would drop to 27000, making it a loss as measured against rising prices. I think that, at the least, 3%(or average inflation rate) of your income should be non-taxable. At most you should be able to write off any earnings that are less than or equal to the amount that inflation devalues certain assets.

It feels that way anyway. Of course, tax regulators might figure this into income tax levels already. And if we did this they'd just raise taxes on the taxable income, but at least everyone might be more protected against inflation.
miggavin, Jun 13 2006

Tax Estimator http://moneycentral...alcs/n_tax/main.asp
Kind of like the online death clock. [miggavin, Jun 13 2006]


       The tax code should be biased to favor workers over investors. The reason is, if the workers can no longer work, the investors will invest elsewhere.   

       Inflation hurts retired people, but it's great for young couples who have just put a down payment on a house.   

       It's part of the reason why most modern countries have inflation-adjusted social security-- so that old people can't complain much when inflation gobbles away their savings.
Madai, Jun 13 2006

       Good points. Though I used a fixed income source as the example, I'm saying at least 3% of WORKER'S income should be nontaxable, or the cost should be a deductible.

If I get a cost of living raise every 6 months, this eventually puts me in a higher tax bracket. My pretax paycheck may have kept pace with inflation, but now I'm paying a larger portion to the government. Fixed income sources would be treated separately, but I feel the same rules should apply.
miggavin, Jun 13 2006

       Then it's the income tax bracket structure that needs to be inflation adjusted.
methinksnot, Jun 13 2006

       I'm not an economist, but I'm pretty sure this would drive inflation higher - essentially setting up a positive feedback loop and possibly leading to hyper-inflation.   

       Inflation is just an inevitable consequence of capitalist economics - deal with it.   

       Also, I agree with [methinksnot] - this way our Government won't be able to 'give' those perpetual 'tax cuts' (which are in fact just adjustments to account for the increasing average wage).
xaviergisz, Jun 13 2006

       In what way should it be adjusted methinks? The point was, cost of living raises are given because of inflation. If the person's income were inflation protected through the tax process, there would be no need to pay people more just to pay them the same.
miggavin, Jun 14 2006

       There are a number of methodologies used in studying the optimum tax bracket structure.
Very simplisticly, what I was proposing was that the tax thresholds could be pegged to your economic indicator of choice (inflation, Consumer Price Index, Capital Goods Price Index for companies -if your jurisdiction does not have a flat company tax structure-, etc), in this case inflation (but you must then agree how you calculate inflation!). So, if the threshold at which you pay a higher tax is say $100k and inflation for the year was 3%, then the following year, it can be adjusted to $103k. Fair?
Maybe not, because inflation is an economic indicator that only partially reflects the performance of the country's economy. If there is more money in the economy, it could push inflation up, which in turn would mean that you would have more money in the economy by way of tax cuts. Central banks would be very quick to raise interest rates (to try and curb inflation) but then you run the risk of slowing the economy too much or overly revaluing your currency (this causes your export sector to lose competitiveness and can lead to trading deficits).

       In my uneducated opinion, income tax brackets should be adjusted by a legislative process with reserve bank involvement and full public transparency. It is a flawed process but I am yet to see a better, credible one.
methinksnot, Jun 14 2006

       I like that. Indexed yearly changes in tax bracket levels.
miggavin, Jun 14 2006


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