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Capital Gains and the Inflation Tax January 15, 2010

Posted by federalist in Economic Policy, Finance, Taxation.

A great many opponents of the Federal Reserve Bank argue that fiat currencies, like the dollar issued by the Fed, have no inherent value and that we are at the mercy of a government-sanctioned currency monopoly to preserve our assets. I have explained that this is not accurate because nobody really has to hold dollars, and even if you are required by government or custom to use dollars for transactions there are small conversion costs from many other currencies and stores of value, so you can choose to minimize your exposure to value deflation resulting from the inflation of any particular currency.

However, even if you eliminate your exposure to dollars you are still harmed by dollar inflation because the government has imposed a “capital gains tax,” which the IRS has implemented essentially as a dollar inflation tax. The peril of fiat currencies is that debtors (like the states or state-sponsored entities that issue them) have an incentive to inflate their way out of debt. National debt becoming too onerous? Just print some more money to pay it off and enjoy the added benefit that this will inflate the currency (deflating the currency’s value) which reduces the real size of the remaining debt. Of course, if nobody uses your currency this will only go so far. But if you assess a tax on the basis of the value of your currency, as the U.S. government does, then it still gets you: As the dollar devalues all other assets appreciate in dollar terms. Call that appreciation a “capital gain” and tax it.

Doesn’t seem fair, does it?



1. federalist - February 5, 2010

DownsizeDC has a campaign that was originally called “End the Inflation Tax” but which has since confused itself with the fiat currency paranoiacs.

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