Do inflation next… I’m actually curious. I’ve always heard inflation framed as a tax, but it seems like it would produce the opposite (and still suboptimal) incentives?
Capital gains taxes don’t just steal your wealth, they change the way you make bets
If you have a 70% chance of doubling your money or losing everything, a full Kelly bet is 40% of your portfolio
But if you are taxed 50% on your winnings, your true upside if win is only +50%, not a double (+100%). Based on these odds, you’d only bet 10% of your portfolio for what is otherwise the exact same bet
And if your taxes are 60%, you shouldn’t take the bet at all
This is such an important concept to understand
1) for yourself so you size correctly
2) so you understand how damaging raising taxes is to entrepreneurs and funding investments that have the chance to make the world a better place.
Source: https://twitter.com/tbr90/status/1733202123100201173
Discussion
Inflation is tax on two layers. It makes you lose your purchasing power because of rising prices. It is like 5% p.a. Inflation taxed all your static fiat wealth 5%. It's more complicated, because the average number is not how prices of goods and services you buy change, it's just some bureaucrat's calculation based on what they think people buy.
Then there's another tax on top. Imagine you invested 1 million usd in a business and made 1.2 million usd at the end of the year. You are taxing income of 200k. But that is not income in real terms, because in order to buy something that was worth 1 million you would need 50k more if inflation is 5% (it isn't, but for illustration). So you are taxed on the incompetence of the central bank to keep the value of money.