Implications of Inflated-Hedged Capital Gain Tax Breaks + Asset Price

Today’s our administration is in the process of putting a proposal that will allow capital gain to be calculated with an inflation hedge. This essentially means that if someone buys an asset for $200k in 1980 and sells it in 2018 for $800k (inflation puts the the original $200k in today’s dollar-term at ~$605k), they will pay the capital gain taxes on just the $195k capital gain, instead of the $600k (acquisition price of $800k in 2018 – purchase price of $200k in 1980).

The implications have profound implications on the US and global financial and capital system as:

1. US Housing + US Treasury Market – Assets that was purchased, partially or fully, for hedging against inflation, might experience sizable fluctuation in real or nominal price in the medium term. For example, some people acquire house for inflation hedge, especially the ones that are utilized as rental properties (monthly rental price appreciates and depreciates typically more than the inflation therefore, allow a perfect inflation hedge + small value-add premium). BUT….on the flip side, I wonder how this proposed new inflation-hedged capital gain will have on the US Treasuries market as main street investors alike purchase T-Bills for inflation hedge + reap the tax-free benefits…
2. Higher Highs and Lower Lows – If liquidity injection contributed to a decent portion of the economic growth creation (as well as asset valuation and gains post GFC), then inflation will soon, if not, plays an even bigger role in what’s to come. But what that being said, given the point above, inflation will potential contribute even more value premium (relative to pre-proposal of that law that is) and that variable will not be used as a crucial variable in assessing asset valuation of any type, so it be real estate or public and perhaps private equity market. On the flip side though, the incentive structure for main street investors might for them to hold their equity holdings a bit longer, which is challenging to argue whether it’s healthy or not…

As Howard Marks of Oaktree Capital puts it,

“Usually, just as a holder’s desire to sell an asset increases (because he has become afraid to hold it), his ability to sell it decreases (because everyone else has also become afraid to hold it). Thus (a) things tend to be liquid when you don’t need liquidity, and (b) just when you need liquidity most, it tends not to be there.”