Quid Pro Quo: Higher Rate for Inflation Indexing
With Mitt (“Carried Interest”) Romney ascendant — and the U.S. deficit bulging — capital gains’ current, historically low tax rate (15% for long-term gains) is coming under intensifying scrutiny.
Should capital gains be taxed higher — and more like earned income?
But they almost certainly should be indexed for inflation, which they’re currently not.
To see why, assume you bought 100 shares of XYZ Corp. in 1986 for $10 a share.
As a long-term, buy-and-hold investor — the kind that everyone should like — you held onto the stock until today, when it was worth $25 a share and you decided to sell.
You more than doubled your money, right?
In fact, net of tax, you’re essentially no better off than you were when you started.
Here’s why: due to inflation, $1 in 1986 is worth less than 50¢ today. See, U.S. Dept. of Labor CPI Index.
After paying 15% long-term capital gains on your $25 stock, you’re left with $22.75.
What’s that worth in 1986 dollars?
Try, just over $11 (vs. your original $10).
That’s a helluva return for 25 years of stock market volatility. Not.
So, yes, let’s change the tax code to make things fairer between the hedge fund types and those whose income derives from traditional wages.
But while we’re at it, let’s make sure that long-term investors — the bedrock of any capitalist system — actually get rewarded for their patience and forbearance.