Inflation tax

Mr. Taxman collects payments in many forms ranging from income tax to sales tax. The most unjust form of taxation in my opinion is capital gains tax that does not take into account inflation. Atleast in my country capital gains are taxed in nominal terms, not in real terms. Only certain holdings like your own house where you live are exempt.


Let's assume that Mr. X won in lottery and bought a property worth of 1.000.000 FIM back in 1980 for investment (not for living primarily). This translates to 168.188 euros and change in nominal terms.
 
Fast forward to 2009 when the property is now valued at three times the original purchase price: 504.564 euros. He decides to sell. Does he make a profit in real terms? No.
 

Picture. A tax collector at work – from an illustration by Henry Holiday in Lewis Carroll's „The Hunting of the Snark“ (1876). Copyright expired. Source: Wikipedia.

See that lizard in the picture? Look left. Lower ... There it is reaching for the pocket of the man sitting (and presumably working despite of all the strange creatures wondering around). At any rate, that's Mr. Taxman collecting money from Mr.X.

Mr.X actually makes a loss of 36.721 euros in real terms. This is because Mr. Lizard (alias the tax man) collects 28% tax from nominal gain - not from real gain.

The nominal gain in this example is 336.376 euros. Therefore, Mr. taxman collects 94.185 euros from Mr. X. That leaves 410.379 euros for Mr.X to reinvest.

In real terms, one million finnish marks in 1980 translates to 447.100 euros in 2009. The real profit Mr.X made is 57.464 euros. However, because he is taxed on the nominal gain, he loses money in real terms. This is what I would call "inflation tax" or "stealth tax". Bummer!!