The Wall Street Journal-20080124-There-s More to Indexing Capital Gains Tax Than You May Think
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There's More to Indexing Capital Gains Tax Than You May Think
Richard W. Rahn's op-ed "Inflation and the Tax Man" (Jan. 17) is absolutely on point.
I am 86 years old. Back in 1957 I realized that in order to protect what little savings I was able to accumulate, that due to our government, our Congress and the executive practicing deficit spending, that inflation of our money was a sure thing. Thus, in order to protect my savings plan, placing money in certificates of deposits, buying tax exempt bonds, buying regular bonds, savings accounts protected by FDIC, etc., would not protect me against the guaranteed erosion of the purchasing power of the dollar. What little I had to save went into the purchase of what I considered blue chip common stocks.
The results of this investment philosophy are well known. Later, practicing law, having clients mostly in the middle class, I found that when handling their estates upon death, their assets were mostly money funds, amounts like $25,000 more or less, but that money's purchasing power had diminished substantially. The number of individuals who owned common stocks was small.
Later, as I was compelled to surrender good utility stocks as companies I owned were absorbed by others, the large amount of "capital gain" threw me into the alternative minimum tax bracket and I paid dearly for the "capital gain" realized. As Mr. Rahn pointed out in his excellent article, there was no real capital gain due to the diminution of the dollar.
Edwin L. Cohen
Louisville, Ky.
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I agree that indexing the capital gains tax for inflation is a fine idea, but why stop there? Why not index the tax on interest income as well? Certainly the small saver and persons who aren't in a position to own equities deserve to keep more of their returns as well. If we're concerned as a nation about our low savings rate, what purpose is served when savings accounts and CDs struggle to earn rates above the rate of inflation, especially after income taxes are extracted?
Kevin Nelson
Woodbury, Minn.
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Mr. Rahn makes a compelling case for reducing the tax burdens of capital gains by increasing the cost of the asset for the effects of inflation. Unfortunately, taxpayers and those like me that professionally prepare tax returns are living in the real world and not in an ivory tower.
Mr. Rahn gives the example of a purchase of a stock in 1984 for $100 and a sale in 2007 for $200. Ah, if only life were so simple. What happens when the shareholder is reinvesting dividends? Am I now required to make 24 separate entries for this sale, one for the original purchase and 23 for each year's reinvested dividends? If the company pays dividends quarterly do I now need 93 entries to record this sale?
Mr. Rahn notes that advances in software make indexing simple. But we are dealing with humans (investors) as well as software. Many taxpayers don't know what they paid for a security let alone the exact date of purchase. People may say that the taxpayers should keep better records or that the broker has the information. But investors change brokerages, and for whatever reason, trust me, many taxpayers do not know exactly when or how much they paid for a security. In an environment of corporate stock spin-offs, stock splits, reverse splits, etc., the task of calculating capital gains is not always as easy as it seems.
I am generally in favor of reducing taxes but I am emphatic about the need to reduce the complexity of tax compliance. Mr. Rahn states that the whole tax code needs to be simplified. I agree. Let's start now by finding a way to tax capital gains fairly without putting an added compliance burden on taxpayers.
Benjamin I. Waxenberg, CPA
Southfield, Mich.
