Tuesday , October 15 2019
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Capital gains and inflation are complicated

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David
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Summary:
So I look at the New York Times this morning and the article saying President Trump will not be indexing capital gains for inflation via fiat. Obviously the significant discussion within the article relates to the political consequences as well as a cursory look at budget math. It would clearly represent a tax cut and, not surprisingly, would disproportionately benefit wealthier individuals and households. There is more complicated and nuanced issue under the surface. Frankly, I would be very worried about the supply and demand aspects within asset markets as the result of such a change. It would seriously impact the willingness to sell at a given price when the seller is facing lesser after tax implications. As a result buyers likely face higher prices for a variety of assets.

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So I look at the New York Times this morning and the article saying President Trump will not be indexing capital gains for inflation via fiat. Obviously the significant discussion within the article relates to the political consequences as well as a cursory look at budget math. It would clearly represent a tax cut and, not surprisingly, would disproportionately benefit wealthier individuals and households.

There is more complicated and nuanced issue under the surface. Frankly, I would be very worried about the supply and demand aspects within asset markets as the result of such a change. It would seriously impact the willingness to sell at a given price when the seller is facing lesser after tax implications. As a result buyers likely face higher prices for a variety of assets. Where we reach a new equilibrium, as I sit here sipping my coffee, is less than clear. It is also the case that there would likely be income and wealth inequality implications. It is long past time that we can ignore such issues when making fiscal policy decisions.

Certainly not all tax and spending decisions by governments need to address such concerns, and the distribution of benefits from policies is only important in as much as ludicrous claims about direct and indirect benefits are a regular feature of policy promotions. For example, we were told tax cuts will create enough further economic growth that they will pay for themselves. They did not. Many countries post mortgage crisis engaged in austerity policies to cut their way to growth. Nobody was successful.

I would hope that people looked at the policy ideas and said there is too much uncertainty about the economic consequences and the end outcome to justify going forward with this policy at this time. One of the hallmarks of this current administration is that they take no time to understand how the last policy change altered the course of the boat before they make the next adjustment. However, the skeptic in me is pretty sure that the inability to arrive at a rationale or political slogan that would help sell the policy change was the real reason for the delay with this policy. If we see continued discussion of recession, or further economic data points that way, I expect this policy idea will be pulled off the shelf again.

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