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Indexing 
by Vice President Knight Allen 

Originally published on August 9, 2018 - reprinted with permission

     Sometimes I come across something the  the financial press which seems reasonable, but when I get into it a bit more it sends  caution lights flashing all over the place.  Such  was the case with an article I read proposing the indexing of capital gains.

    I'm sure most of you know I have been a professional investor since 1980 when I stopped being labor and became capital.  Obviously this proposal would serve my interests very nicely improving my bottom line on every sale of stock I make.  Imagine what it would do for the members of the Forbes 400 list.  The question is:  Do we need it?  The answer in my opinion is:  NO WAY!  I mean, come on.  How much more advantage does capital need?

    Think about that Forbes 400 list.   First, there are no working people on it.  That are all capitalists and their massive fortunes are safely tucked away inside the corporate structure where the profits compound tax free year after year after decade after decade.  Again, tax free.

   Then, if the 400 member wants to monetize some of the assets he can start paying cash dividends - taxed at a reduced rate.  If he wants to cash out he can sell all or part of his holding for capital gains - also taxed at a reduced rate (top rate 23.8%).  This doesn't even account for the tax breaks and loopholes for corporations in the tax code. And don't get me started on the crony capitalism and corporate welfare that have become so dominant in our system today.

   The beauty of the system is that everyone is invited to play.  I accepted in the mid 1970's and have never regretted it once.  Perhaps some of you did too.  I hope you did and that you have done well.  The point is, none of us, 400 member or me or any other stock investor need another advantage like indexing in order to prosper. 

You might be thinking this can't happen.  It will never become law.  Think again because it doesn't have to.  According to the article, because of a Supreme Court ruling in 2002 (Verizon Communications vs. FCC), regulators have leeway defining "cost."  Plus, "the IRS Code does not require the cost of an asset be measured only by its original price - meaning there is no reason the Treasury could not construe it in today's dollars."  This means the President could implement indexing himself.  No Congress.  No rules making. No anything.
   I hope it doesn't happen.  Enough already.  

     Addendum:  No sooner said .  .  .  . 
"Treasury mulls capital gains end run." LVRJ 8/1/18
    Report from the AP: "The Trump administration is studying the idea of implementing a big tax break for wealthy Americans by reducing the taxes levied on capital gains, but no decision has been made yet on whether to proceed." 

     Treasury Secretary Steven Mnuchin would like to defer to Congress but, 'If it can't be done through a legislative process, we will look at what tools at Treasury we have to do it on our own and we'll consider that."
  There is no mention in the article of Verizon vs. FCC.


   Since we are on the subject of indexing and where it shouldn't apply, let's talk about an areaa where it should apply but doesn't.  I'm talking about the income level subject to Social Security (SS) taxation.  
 CNBC  10/30/17:  "Retirees must manage SS income well to avoid the 'tax torpedo."  The income amounts that are subject to tax are not indexed for inflation."

Fox Business 3/9/18:  Interview with Mary Johnson - Senior Citizens League SS & Medicare Policy Analyst.  

About 56% of all households pay taxes on Social Security benefits.

   "The problem for older taxpayers is the act the income thresholds have never been adjusted for inflation.  When Congress first enacted the tax on Social Security in 1983 it was estimated to affect only 10% of Social Security recipients.  Today the taxation of benefits hits almost everyone with any income in addition to Social Security benefits - even people with the most modest of bottom lines.  An older couple with $32,000 is living at just 155% of the federal poverty level.  Had the income thresholds been adjusted for inflation since 1983 the $25,000 threshold for individuals would be $61,940 this year and the $32,000 threshold (couple) would be $79,284."

  This is an election year and we have some hot and heavy races happening.  This includes a key U.S. Senate race plus all the contests for the House of Representatives.  Have you hear any candidate talking about this?  I haven't and we won't.  The system is working far too well for the federal government to have anyone throw a wrench into the money machine.

    Too bad.  But after all this time I guess it does say something about the mindset, across the political spectrum, of the ruling class.  

Contact Vice-President Knight Allen  

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