The Most Insidious Tax

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.

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  1. Cletus Dummkopf said:

    The problems with the US tax code are legion and go far beyond the explicit rate. Consider for instance the tax-deductibility of interest. This, in combination with artificial below-market interest rates, has encouraged US corporations to engage in share repurchases instead of investing in new business. And the endless, all-you-can-eat 0% money that the Fed has provided to banks through QE has goosed the equity markets to new post-crisis highs at above 1500 on the S&P and a Shiller PE ratio of 22. New housing bubbles are starting to reappear in California/Vegas/Arizona with the Fed’s help. This will not end well and many ‘investors’ will be left holding the bag. Without the tax-deductibility of interest and “carried-interest” it is doubtful that LBO chop-shops (now known by the more euphemistic modern term “private-equity”) would be as widespread as they are today. So the government and K-street can engineer the economy in many ways through the tax code.

    An income tax generated off earned income is the most degrading of all taxes. Tellingly, a “heavy and progressive income tax” is part of Section 2 in the Communist Manifesto. In its first roughly 120 years of existence the US had no income tax and operated with revenues without touching a worker’s paycheck. Far from coincidence, the 16th amendment and Federal Reserve act were both enacted in 1913. We would do well to repeal both. Instead the government should raise revenue through tariffs on imported goods, user fees, royalties on natural resource extraction, property sales and excise taxes on luxury goods like cars, jewelry, alcohol, tobacco, etc. Of course, the amount of revenue raised would be much smaller, but all the better! We would be forced to take a hatchet to government spending.

    In the intermediate term, focus on the major spending programs of the federal government: entitlements and ‘defense’ spending. Means-test Social Security and remove the $113,700 salary cap on the regressive 15.3% FICA tax. Slash defense back to what we truly require for actual defense: the Coast Guard and a small, elite group of special forces.

    Please watch these two interviews with David Stockman, President Reagan’s director of OMB from 1981-85. In both he explains very well the current predicament we are in and the way out.

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