Cutting taxes by means of inflation adjustment vs. reducing regulatory subsidies to state borrowings?

Sir, Sam Fleming reports “The Treasury has been examining the merits of adjusting capital gains taxes for inflation” “White House push to cut taxes for rich faces thorny obstacles” August 3. 

Fleming points out that the “initiative could cost $100bn or more over 10 years” and “Estimates from the Congressional Research Service suggest as much as 90 per cent of the benefits would go to the top 1 per cent of households.

Steve Moore, a visiting fellow at the Heritage Foundation opines: “It would be good for the economy. This is something we as free market people have been talking about for a long time.”

I am for free-markets, and I defended with great enthusiasm even more extensive inflations adjustments when they were introduced in Venezuela some decades ago, clearly before its current anti-free market regime came to power.

That said I would now use this occasion to ask, are such inflation adjustments, which reduces tax income, really compatible with the 0% risk weight assigned to the quite sizable US debt for the purpose of the capital requirements for banks?

That 0% risk weighting, de facto subsidizes US public debt, and which, on the tune of some 21 trillion in debt, could easily represent $100bn or more over 10 years.

If I were to choose, both from fairness and a free market perspective, I would much rather cut the bank credit distortions in favor of the sovereign than the inflation adjustment.

Just for a starter that would allow all to see better what the real unsubsidized interest rate on government debt is, and that should be useful, except fro those who do not want that to be known. 

PS. With a 0% interest rate, a 2% inflation target, how can regulators argue a 0% risk weight for a sovereign? That is of course unless they are from Venezuela or Zimbabwe, and only think of honoring public debts in nominal terms with the printing machine.

@PerKurowski

Current bank regulations express much more than Brexit, a dangerous payday-loan mood.

Sir, Tim Harford refers to “the payday-loan mood it is displaying in its Brexit negotiations. No gain is too small, no price too great, as long as the bill comes later.” “Want to solve a problem? Just wait” May 26.

Current risk weighted capital requirements cause banks to give much more credit to fairly unproductive but “safe” sectors, like housing, and less credit to potentially much more productive but “risky” ends, like loans to entrepreneurs. I would hold that follows a payday loan mood put on steroids… one that in complete violation of that holy intergenerational social contract Edmund Burke spoke about, places a reverse mortgage on our current economy.

Sir, just reflect on that the regulators assigned a 0% risk weight to sovereigns. That can only be justified arguing that the sovereign can only print money to pay back debt expressed in its own currency. Indeed but that spurious argument blithely ignores that printing money to pay back its own debts, is precisely one of the worst misbehaviors of a sovereign, like when Venezuela’ government prints loads of money, among other to serve its own internal debt.

And Harford reminds us: “The world is full of risks. Can anyone guarantee that over the next 300 years both the UK trust fund and country will survive asteroid strikes, thermonuclear war or a deliberately engineered pandemic?”

Indeed, that’s true, but how come then when regulators imposed their risk weighted capital requirements on banks, we decided to naively believe them, instead of asking: Who are you to know what the risks in banking are? And if you do, why are you not then the bankers?

@PerKurowski