75-11-A5
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Inflation As Tax
TranscriptRiddle-When is a tax not a tax?- Answer when it's inflation. I'll be right back. I know it's a cliche and we've all heard it and said it ourselves that inflation is the cruelest kind of tax-hitting hardest those who can least afford it. I wonder though if we really understand that inflation is in fact a tax increase-, a way government can raise more revenue without raising the rates. Take capital gains. Now this is the profits you make of something you bought a while back has become more valuable and you sell it for more than you paid for it. This can be a farm, a home, a lot, you were going to build on and didn't, that old car that suddenly became valuable to a collector or stock you bought. But what if your increased sale price is an increase in dollars that aren't worth as much as they were when you bought it? If you sell your home for twice what it cost but all homes are now worth twice what they cost because the present dollar is worth only fifty cents, then you haven't made any profit. But the tax collector says you have. If you paid 20,000 and sell for 40,000 he says you've made 20,000 upon which you must pay a tax even though 40,000 today will only buy what 20,000 bought at the time of purchase. The answer is very simple, but not too many politicians are going to suggest it. The sales price should be computed in constant dollars, meaning the dollars should be valued at their purchasing power now compared to their purchasing power when you first acquire the property. Let's turn to your paycheck because here's where the government really profits from inflation. We have a progressive income tax. As your income increases you find the government takes a higher percentage, say, of the second $10,000 you earn than of the first. Now let's say you get a raise simply to keep even with the increased cost of living, to make you able to buy what you could before the raise. But you can't. For that increase in the number of dollars put you into a higher tax bracket. The government takes a greater share of those new dollars, and suddenly you find you haven't kept up with inflation. After taxes you're worse off than you were before the raise. Nine times out of ten though you blame high prices, not your taxes. Now let's take an actual example. The man who earned $10,000 dollars a year in 1966 earns (if he's the average) 15,000 today. That $5,000 increase is a little more than the increased cost of living. Actually, $3800 of his raise is eaten up by inflation. Still he should be $1200 better off than he was in 1966-but not after taxes. At 15,000 he's in a higher tax bracket. The government takes the $1200 plus a $159 more, making him a $159 worse off than he was in 1966. Now there's an answer—a very simple one, a proposal by Senator James Buckley of New York which has been greeted with thunderous silence by his liberal colleagues. He proposes what is called indexing the progressive tax brackets so as to reflect the lowered purchasing power of the dollar. In other words you would move up to a higher tax bracket only to the extent that your increased income exceeded the increase in the cost of living. In the example I just gave that $10,000 a year man would stay in the same tax bracket for $3800 of his $5000 raise and would only pay an increased rate on the $1200 if that moved him into a new bracket. Congress is very busy talking tax reform. Now is the time for you to start those cards and letters. If government suffered the same pain from inflation that you do, instead of making a profit on it they'd do something about it. This is Ronald Reagan. Thanks for listening. |
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