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Indexing Gains For Inflation
One of the justifications for historically
having a lower tax rate for long term capital gains taxes than for normal types
of income is the fact that some of the gain is really just an increase in the
cost of living between the date the asset was purchased and when it was sold.
However, using just one tax rate doesn't distinguish between the changes in cost
of living for an asset sold after only 12 months (the current threshold for long
term treatment) or an asset sold after 30 years.
An idea that has been discussed for decades
is adjusting the cost of assets by the inflation that has occurred since their
purchase.
When it comes up for discussion in D.C.,
there is always someone very eager to claim that to adjust cost bases is too
difficult and would therefore by unenforceable. That is a big pile of B.S.
and they know it. It is a very easy task to obtain the cost of living
figures. I remember getting them from the government back in 1992 to
illustrate this point. It was a snap. Now, with the web, there are
several sites from which the official CPI numbers can be obtained. Many of
them will actually do the inflation adjustment calculations for you.
For example, suppose you bought some land for
$10,000 in 1976 and are selling it for $30,000 in 2001. Based on the
historical interpretation of the cost basis, you would have a taxable gain of
$20,000. However, using
this CPI
calculator, the inflation adjusted basis would be $31,283, yielding a
net loss in purchasing power.
George H. W. Bush (aka Bush-41) was
essentially fired by the voters of this country for his incompetence when it
came to taxes. First, he flagrantly broke his "Read my lips - no new
taxes" 1988 campaign promise. He also refused to exercise any initiative
when it came to reducing the tax burden. A golden opportunity was
literally handed to him in the Summer of 1992 to show the voters that he wasn't
as much of a wimp as he appeared to be; and he refused to act on it.
I have refrained from any criticism of George
W. Bush (aka Bush-43) because he has been receiving such ungodly amounts of it
from the professional Bush-bashers in the media. However, my fear, and
that of many other conservatives, is that he is so eager to come across as the
compassionate conservative that he will follow in his father's footsteps and
wimp out from any real tax law reform.
Specifically, I am referring to the study
that was published in August 1992 concluding that the President has the
authority under the Internal Revenue Code to issue an executive order defining
the cost basis of assets to be adjusted for changes in purchasing power.
At the time the study came out, the Wall Street Journal printed a
long article
from one of the study's authors and published
editorials encouraging Bush-41 to
issue such an order. Other supporters of capitalism did everything we
could to push him off of the fence on this issue. I wrote several articles
back then on this very point and included a discussion of it in most of my
speeches and seminars.
Basically, the study concluded that the term
"basis" as used in the tax code is vague and ambiguous and subject to
interpretation. For the past several decades, the tax collectors at IRS
have interpreted that term to mean constant dollar amounts. An asset
purchased in 1976 for $10,000 would have a cost basis today of the same $10,000.
Since the IRS is part of the Treasury
Department, and thus under the control of the Executive Branch and the
President, they have the ability to change the traditional interpretation if
they so desire to allow for adjustments to compensate for the changes in
historical purchasing power (inflation).
As we all know, Bush-41 lived up to his wimpy
image and refused to do take such a bold step. The rest is history.
He turned over the control of the Internal Revenue Code to a bunch of Marxists
who were not about to do anything to reduce the government's take.
With the Marxists finally out of the White
House, I think it is time to resurrect that idea. Having an excellent
memory when it comes to such important matters, as well as a huge collection of
clippings and other reference materials, I pulled out my copy of the original
study and the original Wall Street Journal editorial
about it. I contacted
the National TaxPayer Union, which had sponsored and published the original 90+
page study and reminded them of it after I was unable to locate any mention of
it on their website.
I am happy to report that the fine people at
NTU have finally scanned the original report in and have it
posted as a PDF file on
their site.
They have come to the to the same conclusion as I have;
that nothing has changed in the tax code since 1992 that would prevent the
President from issuing an executive order changing the definition of cost basis
to take into account changes in the cost of living. All it requires is a
backbone. If Bush-43 really is serious about wanting to reduce the taxes
on capital gains, this would be a much quicker way to accomplish that than to
try to get it through Congress. If the Socialists in Congress don't like
the new interpretation, they will have to pass a law explicitly changing the tax
code to be very specific in the definition of the term "cost basis" to be the constant
dollar amount. If such a law were to actually make its way to the Oval
Office, this would give Bush-43 another opportunity to flex his tax-cutting
muscles by vetoing it. In my mind, this is a no-brainer for the Bush
administration and I fail to understand why I am the only one discussing
this approach.
KMK
This page was updated:
Sunday, January 29, 2012
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