Inflation-Adjusted Capital Gains

Rolaids - Tax Relief for the Rich! (Only?)

Client (“C”) to Advisor: I was reading in the NYT (07/31/18) that the guy with the funny name, Capuchin, wants to give a $100 billion tax cut to the wealthy.
Advisor (“A”) to Client: Let me remind you of the ground rules: we don’t talk politics.
C: But it can be fun…or I guess dreary, depending on your point of view.
A: Right, either way we lose half our readers, capisce?
C: Si signore.

A: Okay, let me try to explain. The guy’s name is Mnuchin, not Capuchin, and he wants to index long-term capital gains for inflation.
C: What’s a long-term capital gain?
A: That’s when you sell an asset that you’ve owned for more than one year.
C: Like a stock, a house, or my dog?
A: Not a dog, what’s the matter with you?
C: Okay Mr. Fancy pants, how about an example of a capital gain indexed for inflation?
A: Sure, don’t you own shares of the stock market with your Exchange Traded Fund, SPY?
C: Yup, Mr. Brilliant bought ten shares on 01/02/09, near the bottom of the market, for $770. Today they’re worth $2800. I’m gonna sell them and buy me an ice cream truck.
A: How about taxes?
C: Waddya mean?
A: You made $2030, and the federal government taxes your gain at 20%, so you have to pay $406.
C: Okay, I’ll give those guys $406.
A: But we’ve had almost 17% inflation these last ten years (statbureau.org). So now your cost basis is $900, not $770 and you only made $1900, not $2030. Your inflation adjusted taxes would be only $380, not $406.
C: WHAT? The government took $26 more from me because they said phooey to inflation? That’s highway robbery. I want term limits!

A: Back to the NYT article, which states that “capital gains are overwhelmingly paid by high earners”.
C: Hey, these guys make enough money. String ‘em up.
A: Will you please? But in 2016 the Congressional Budget Office said that in 2010 “more than 70 percent of families owned property designated (by the IRS) as capital assets”.
C: So almost everyone is wealthy. Build a bigger gallows!
A: I won’t dignify that comment with a retort. Do you know how much a person at the 70th percentile makes?
C: A trillion dollars?
A: No, according to a 2016 calculator provided by dqydf.com, the income at the 70th percent is $32,250, which means that if you earn that much money there’s a good chance you’ll have assets to sell at long-term capital gains tax rates.
C: Wait a second, I made $40,000 at my job at the sewer commission. That means I’m rich.
A: No, that means you might have an asset that you can sell and pay less tax.
C: So indexing for inflation will help me as much as the big guy?
A: Relatively speaking, yes.
C: So why does the headline say “tax cuts for the rich”?
A: Almost everyone hates the rich, like many people hate the Yankees.
C: Go Mets!