Capital Gains and Inflation

Here’s an interesting point from Josh Barro about an underrated source of political resistance to expansionary monetary policy:

But one likely barrier to a higher inflation target is a quirk of tax policy: non-indexation of capital taxation means that higher inflation causes a stealth rise in the real tax rate on capital gains and interest income. Naturally, this makes investors more keen on rock-bottom inflation than they otherwise would be — and the Federal Reserve Board is institutionally likely to focus on the interests of the investor class.

Barro deploys this to try to get people like me to back CPI-indexation of capital gains taxes. Another point to make would simply be that the domination of policymaking by the interests and predilections of rich people is dangerous. At the end of the day, though, if you’re a rich person worried about the capital gains tax implications of the Yglesias Inflation Agenda, consider this: Every time central banks announce big expansionary moves, markets soar. The real gains entailed by more robust growth should easily outweigh tax considerations. That’s not to deny that there’s a case for wide-ranging reform of the US tax code, merely to say that appropriate monetary policy shouldn’t have to wait for it to happen.