Monday, March 2, 2009

Dow 6,760 Means $1,452 Loss After Inflation

If you bought into the Dow Jones Industrial Average the last time it was at 6,760, the approximate close from today, after inflation you would have lost approximately $1,452 even though the price is the same.

This basically means that the Dow would need to be at 8,100 or so just to break even, but that excludes the fact that you would be paying taxes on the inflation portion of your earnings.  So that means you'd need to be at 9,180 or so, assuming the top federal tax rate and some reasonable allowance for state income taxes. Considering that inflation is the result the government printing too much money (inflating the money supply) which results in price increases, meaning it is basically a 'hidden tax', you essentially pay taxes on your taxes.

Now, an adjustment could clearly be made to the above figures to use a capital gains tax rate, but keep in mind that the reduced capital gains rates are not long for this world.  BUT, does this not highlight why capital gains taxes should essentially be zero?  Should you pay taxes on inflation?

No wonder people try and shelter their money elsewhere. 

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