Neglecting Inflation

What’s wrong with taxing individuals making over $200,000 and couples making over $250,000?  Nothing, if you are honest about what is really going on.  The health care plan in the senate would mean new taxes for ‘rich’ folks in these tax brackets.  Worse still?  It doesn’t account for inflation in this calculation.  What follows is a calculated tax which, like the Alternative Minimum Tax, will slowly creep into the middle class as inflation starts to show up again.

How Bad Will It Hurt?

Using the methods I detailed before to calculate the market’s perception of the risk of inflation, the market is pricing in inflation of 2.3% over the next 20 years, and 2.06% over the next 10.  This totals inflation of 57.58% over the next 20 years, and 22.62% over the next 10.  If the tax stays at incomes over $200,000 for individuals and $250,000 for couples, this means that individuals who now make $160,107.66 yearly and couples that now make $203,884.57 yearly (if they only match inflation in their salary increases for ten years!) will suddenly have to pay.  Over twenty years, that number works out to $126,916.28 annually for individuals and $158,645.35 annually for couples (salary for today).

What About Worse Inflation?

If you believe that the deficit means the United States will soon start to inflate its currency (to its advantage), the best proxy is probably the stagflation of the late 70s.  In December 1971 the CPI index was 41.1.  At the end of 1981 it was 94.0.  Over those ten years, inflation ran at 56.28%.  If this tax was enacted in December of 1971, by  December 1981 couples making 159,972.77 a year in 1971 and individuals making $127,978.22 a year in 1971 would be paying the tax (assumes raises matching inflation).

Don’t kid yourself.  If the government has an incentive to increase inflation, what’s stopping them?  I’m interested in your thoughts.