Friday, November 2, 2007

Taxes and Inflation

Been thinking about this for a while...

There needs to be a real measure of inflation, other than the BS CPI, which is basically made-up by the government. Once we have a real inflation index, the tax brackets should be automatically adjusted for inflation, and your income should be reduced by the inflated value of your net assets.

So, for example, say I have $100,000 in net assets, and there's 10% real inflation in a tax year. That would mean that the first $10,000 in income I make is tax-free (doesn't count toward graduated tax, effectively "below the scale"), because that's the effective natural increase in the dollar value of my net assets due to real inflation. The effect of this would be that if I'm only keeping pace with inflation (not gaining or losing any real net assets), I would not pay any taxes.

Contrast to the current system, where inflation is great for the government, and absolutely screws people who try to save money. To exemplify the point, say real inflation was 50% one year. If I have $100,000 in cash, I have to make $50,000 on it to keep up with inflation. But wait... I have a 33% tax rate, so I actually need to make $75,000 to end up with $50,000, just to keep up. But there's no way to avoid having to make 50% more return than inflation just to break even in net value, because you're taxed on your dollar gains, not your actual gains. You're much better off spending every penny you get; at least your salary will scale roughly with real inflation. No wonder nobody in the US saves any money, and everyone is in debt up to their eyeballs: the government promotes it.

Issues like this make me wish that not all the politicians running the country were actively screwing the people.

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