The stock market has been jittery recently amid trade war fears and the possibility of more government regulation for tech companies such as Facebook and Amazon. With the recent market turbulence, is there any hope that the Dow can shatter its all-time high of 26,616 this year?
Short answer: Yes! In fact, if President Trump takes a page from “Improbable Success Productions” Chairman Richard Rahn, Dow 27,000 may be just around the corner.
Writing for the Washington Times, Richard Rahn made the case for one big idea to turbocharge the economy — protect capital gains from inflation. As Rahn wrote:
If your employer gives you a 2 percent wage increase, and inflation is 3 percent, has your real income increased or decreased? Assume you bought a horse barn and 40 acres of land for $200,000 in 1988 for a riding school you operated. You have just retired from your business and sold the land and barn for $360,000. In the 30 years from the time you originally bought the property, the value of the dollar has fallen by about one-half due to inflation — so, rather than having a $160,000 gain from the sale of your property — in real (inflation-adjusted) dollars, you suffered a $40,000 loss.
The IRS will claim that you had a $160,000 gain, and charge you a capital gains tax on it (at a current rate of up to 23.2 percent, not counting any state capital gains tax rate). After adjusting for inflation and taxes, there was a real loss of roughly a third of your investment.
The government causes inflation by “printing” too much money — i.e., expanding the money supply faster than the increase in goods and services. To put it more directly, the government has stolen about half the value of your money over the last 30 years and then the IRS has had the unmitigated audacity to tax you on the government theft of part of your property. Such actions by government agencies not only show a lack of moral compass by those who promulgate such rules, but deep-seated corruption, which is damaging to both economic growth and civil society.
Now that Larry Kudlow has the president’s ear, I hope he will convince Mr. Trump to issue an executive order to index capital gains for inflation — which the president has full power to do. By doing so, the government would move toward more consistency in the definition of cost, spur economic growth and job creation, increase government revenues, and most importantly stop the immoral practice of taxing government-caused inflation.
Richard Rahn’s proposal would do more economic good than any policy (I know of) currently being considered by Congress. Rising inflation is simply a de-facto capital gains tax hike on investment. The status quo of taxing capital gains as if they were actual gains makes it more difficult for individuals to invest in the future because they have to factor in to what extent inflation could erode their potential gains.
It’s much harder to make a ten-year investment when you have to estimate how monetary policy will play out over a decade!
Best of all, as Richard Rahn mentioned, capital gains could be indexed to inflation with just the stroke of a presidential pen. Doing so would provide individuals with greater certainty as they invest for the future, and it will help ensure the Trump stock market rally keeps on ‘winning’!
Photo credit: OTA Photos via Flickr, CC BY-SA 2.0