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Inflation Tax Policy

treat inflation and deflation as capital events
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much noise was made recently of the possibility of taxing unrealized gains -- one of the most pernicious, and frankly idiotic ideas to seize the left flank of various political classes and taxing authorities, but we digress.

a recent news story about Eric Adams, the new Mayor of NYC receiving his pay in Bitcoin (as Bitcoin happens to be falling) triggered this idea:

cash, in whichever currency, also fluctuates in value -- it is measured in other currencies (i.e. the exchange rate) and in inflation measures.

so if you had $100,000 in a savings account through last year (2021), with the US annual inflation rate for the same year being 7%, this money lost 7% of it's purchasing power, or $7,000

If you had a billion (9 zeros) in the bank, you lost $70 Million of purchasing power.

lots of govt assistance programs adjust for inflation -- why would savers be penalized (on TOP of actually losing purchasing power) by not being able to deduct the actual loss they experience?

theircompetitor, Jan 21 2022

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       incidentally, if there's one thing that's genuinely exhausting and beat your head against the wall irritating, is the insistence by some truly distasteful politicians, like Elizabeth Warren, on the idiotic "Warren Buffet's Secretary" comparisons.   

       In the US, $75,000 annual salary is was a breakeven for 2020 -- meaning you did not pay net Federal Income Tax at that number. Even at $100,000 income, your effective tax rate is likely < 2% -- and that's not counting for major deductions like the the home mortgage deduction.   

       So while it's completely obvious that Buffet in fact DID pay more MONEY than his secretary, no dishwasher -- an example Warren used in her latest attack on Musk-- no dishwasher, even one actually working on a paycheck rather than cash, which avoids taxation alltogether -- no dishwasher has EVER netted out a dime in Federal Income Tax
theircompetitor, Jan 21 2022
  

       For symmetry, if you have a loan, does the reduction in the loan value caused by inflation count as income?
scad mientist, Jan 21 2022
  

       If not, I'd like to loan you a million dollars at 0% interest, if you loan me a million dollars at 0% interest. Then we can both deduct $50,000 in losses from savings inflation. Of course I made the interest rate 0% because otherwise we get taxed on the interest income, but can't deduct the interest we pay on the loan (unless it's the mortgage on our primary home). Oh, wait, we can call that investment interest, so can deduct it against investment earnings, so maybe the interest rate we charge each other doesn't matter...
scad mientist, Jan 21 2022
  

       Speaking of taxing unrealized gains and loans, one loophole I've heard of that really should be closed is the practice of taking out a loan rather than selling appreciated stock.   

       Apparently, people who hold huge stock portfolios with significant unrealized capital gains (company founders and the like) will often take out large loans rather than selling stock. They get highly favorable interest rates because the stock they put up as collateral is worth way more than what is being borrowed. Say they have $1B in stock and take out a $100M loan. An article I read said that at the time of death, the net value of the estate is the value of the stock, minus the loan, so the estate tax is only on $900M. But when stock is sold to repay the loan, the step- up basis is already in effect, so there is no tax on the gains. So basically they just got $100M with no tax on the capital gain. This sounds completely wrong to me, but I haven't been able to find enough information to prove that this maneuver isn't allowed.   

       A lessor loophole exists, if a moderately rich person has $10M of stock, which lets say has appreciated from $5M over the last 10 years of their life, if they sell $1M to buy a house for cash, they pay capital gains tax. If instead, they take out a loan for the bulk of the house value, when they die, they are under the limit for estate tax, so the step-up basis allows for this to pass tax-free to their heirs.   

       It seems that a reasonable rule might be that if anyone owning liquid capital assets (stocks, bonds, cryptocurrency, etc.) takes out a loan (held for more than say 3 months or something to avoid credit card use triggering this), they must realize capital gain (and increase the basis) on the asset of their choosing. Probably exclude tax exempt retirement funds from this as well since those don't have taxable capital gains.
scad mientist, Jan 21 2022
  
      
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