Recently the U.S. government raised the long-term capital gains tax rate from 15% to 20%. Think for a second what this means. Think what a “capital gains tax” really is in a fiat money economy. It may be the perfect tax for targeting and destroying what remains of private ownership and freedom. Why?
When a government or central bank prints worthless fiat currency, such as our Fed does, it steals real output from the private sector by issuing a currency that is steadily shrinking in value in exchange for real goods and services. This is what is referred to as an “inflation” tax. It can be collected by counterfeiters and especially the largest counterfeiters of all—central banks.
Now simple logic tells us that the more a government abuses its monopoly of printing new money, the higher the inflation tax will be. Therefore, the higher will be the appreciation of all real goods and assets measured in terms of fiat currency. So when these goods and assets are traded, the higher, therefore, will be the realized “capital gain.” Talk about gaming a rigged system. The government will get you coming and going. First, with the inflation tax and then with the arbitrary capital gains tax collected in terms of an increasing value of real goods and assets measured in terms of its weakening currency. It’s a perfect example of the government having its cake and eating it too. Practiced to an extreme, it’s perhaps the ultimate scheme for destroying private property.
Now consider how such a “tax” would work in a world using capital as money.
Of course, “capital gains” taxes would not be collected on appreciation of broad productive capital because, as money, capital would be the numeraire good in which all other goods and services were valued. That is, by definition the value of a unit of broad productive capital in terms of itself would always simply be just 1—as the value of a single unit of any money is always just a unit of itself. Therefore, on average, there would be no “capital gains” tax on productive capital.
If such an insidious tax persisted, it would largely be de-fanged because it would only be collected on extraordinary gains of other single goods and assets relative to the average value of the money or valuation good. Since the value of broad capital would be growing at rate over time equal to the sustained rate of growth of the economy (for a more detailed explanation see our book Capital as Money), you would not expect to see a large set of goods or assets whose rate of return would steadily exceed that.
This is why the ownership of broad productive capital seems to us the compelling choice for money. Imagine an asset used for exchange and valuation whose own value steadily grows over time in terms of consumption goods and services. What a recipe for peaceful sleep by money holders! What an antidote for a weary world historically on the wrong end of the traditional government/central bank inflation game. In fact, “inflation” would be an alien and odd concept in such a world. It is the primary logic for choosing capital as money.