Are unindexed capital gains taxes inherently confiscatory?

Question

Say I buy a house for $100K whose price exactly keeps pace with inflation. If inflation runs at an average of 3% and if I own the house for 20 years, then in 20 years it will be worth 100K x (1.03)^20 or 181K. If I sold the house, I realize a (purely nominal) gain of $81K, but in reality I'd still need the entire $181K to buy a house of comparable value 20 years down the road (assuming they also appreciated at the rate of inflation). Isn't the tax on the ‘phantom gain’ of $81K unethical since it confiscates part of the purchasing power I tied up when I originally bought the house? It seems to me that this argument would apply to *any* capital asset held for a significant number of years in an inflationary environment, even in a "low inflation" environment like the one we have now. Am I missing something here, or is this blatantly unfair?

Answer 1

For a single person, the first $250,000 gain on the sale of a home is tax-exempt. (usually, but not always)

Yes, I agree and I despise Capital Gains taxes on any assets. People should be rewarded for wise investing and upkeep of their assets.

Politicians don't care about fair, they care about getting your money.
.

Answer 2

For 16 years the UK applied inflation to the cost of assets for capital gains tax purposes. So if you bought something in 1982 for 100,000 pounds and sold it in 1998 (when the rules changed) for 200,000 pounds, you would pay no tax, as prices roughly doubled in that time. The index they used (no matter what the asset was) was the equivalent of the CPI in the USA.

They changed the rules in 1998 so that, for each complete year you held an asset you get taxed on less and less of the gain. Three years got you taxd on 100% of the gain and 10 years got you taxed on only 25% of the gain.

The difference is that the UK charges capital gains tax at (broadly speaking) regular income tax rates, whereas in the USA you pay 5% or 15% on most assets held for more than one year.

I think indexation is the fairest system of all. The US system penalizes the middle class taxpayer who has a gain once in a while, whereas the wealthy get quite a nice tax break.

Answer 3

In a way it would be more fair to index capital gains for inflation, but I would argue that we should also index interest income, which is similarly overtaxed, as well as other types of income from investments. At least with capital gains, you pay a lot lower tax rate than you do for other types of investment income.

Answer 4

Technically, you are correct. However, you are making the mistake of trying to apply logic to tax law. That just doesn't work.