The Unkindest Tax of All
It’s a rigged game
[Eighth – and last – in a series. The beginning is here]
So, convinced that inflation is a tax that threatens your future, you STOP eating Doritos and STOP watching Dancing with the Plebes, get off your couch and start investing.
You are 20 years old and have $100.
More than a century shows an average general market return of 9% per year over the long run. There are things known as transaction costs and capital gains tax, both of which syphon off your earnings as you go in your battle to keep up with inflation. WHAT?!?!?!?! You exclaim, I pay taxes on what I make just offsetting inflation?!?!?!?!? Since inflation is a tax, isn’t that a tax on a tax?
You got that right. Ain’t Government Grand?
The Five-Year Plan
After 5 years at 9%, you are now 25 and your nest egg has grown to $151.67. The excess $51.67 is something called “capital gain,” a part of which is due to inflation. The government does not care. If you sell your investment, you must report all the gain as income and pay about 30% of it (depending on what state you live in) to the government as capital gains tax, in this case $15.50. Your net-after-tax in 5 years is $136.17.
Why Five Years?
There is this thing called “Life” which has cycles. Time, money and people all mix to produce change. For various reasons, you and everyone else “cash in” occasionally. Either the market or your personal life presents some reason to liquidate your investment and reinvest in something else. THE END comes when principal is spent, investment accumulation stops. Assume your maturity, wisdom and discipline prevail and you immediately re-invest your $136.17 for another round. The important point here is that converting to cash is costly. The cost is in two forms, capital gains tax we have already covered and transaction costs of selling and repurchasing. For illustration we will make the latter 1%. We need a length for a cycle, so we arbitrarily pick 5 years. You start the next round with $134.81 (99% of $136.17) and life goes on.
Get a Life (before taxes if you can)
Do this ten times and you pretty much exhaust your adult investing life. Your original $100 is now $1,918.74, an average annual net-after-taxes-and-costs return of 6.1% over 50 years. I leave it as an exercise for the reader to figure out what the $100 should have been for that (now) very tired investor to be able to retire. But the abstraction is what counts. Suppose there had been only one long cycle. Consider a single investment, one 50-year marriage to one investment over one life during which there was no capital gain tax and no transaction cost. The original $100 becomes a nest egg of $7,452.70, nearly four times the $1,918.74 total on the Ten-Five-Year-Cycles plan, punctuated by brokers and the taxman every few years.
In the plot below we see that, under the Tax the Inflation Tax System, private wealth accumulation is a decreasing function of the number of transactions incurred during Investment Life. Basically, tax collectors and the moneychangers liquidate you over time.
So, What’s the Point?
Government should exist for the purpose of reducing uncertainty. It does the opposite (no surprise there). It is in government’s interest to inject as much chaos as possible into the picture of Life to induce asset churning, therefore producing taxes, with each transaction. The education system is both victim and conspirator. Government education sees to it that no voter can understand the calculations you see above and reason through the consequences to predict what happens over time. The public is old and gray before they realize how the treadmill has been constructed beneath them.
He Reaches for His Tin-Foil Hat
Oddly, this was the genius of the COVID ruse. Nominally fabricated to remove a sitting president sure to be re-elected, it was designed to send a nation of poorly educated, terrified citizens to hide under their beds imagining, fancifully, that their government would save them. In the resulting bedlam many unwise taxable transactions took place as suddenly unemployed people became more confused, depressed, alcoholic, violent and irrational. It did not matter that many were paid for staying home. The inflation caused by “Helicopter Money” and supply chain disruption ratcheted up the churn to a fever pitch. Was it justified? In 2019 the natural death rate was 7.6 per 1000 per year. That rose to only 8.3 per 1000 two years later, a difference still within the long term average. To stir the pot faster, introduce trendy, politically correct, over-reporting of COVID as the primary cause among multiple co-morbidities. Ultimately, you follow the money. Hospitals were paid more for treating COVID. What did you expect to happen?
Get ready for more
It just gets better. Your government can’t wait. At this link you will find one of your favorite presidential candidates planning to tax unrealized gains whether you sell or not.
[Next time: …I said this was the end. “The End” means there is no next time. Someday there really won’t be]