Even in these days, the idea of a capital levy sends cold shivers down the backs of conservative Congressmen. Huey Long's plan still shocks the majority of our people, even in the depths of the depression, and Congressmen know it. All the more remarkable, then, that a virtual capital levy has been passed through their midst without any realization of its significance. No one saw that the capital gains tax takes this form during an inflationary period.
The taxes on capital gains are levied according to the dollar appreciation of capital. If this appreciation is caused by reinvested earnings, it is a tax on income. But if the appreciation is caused by devaluation, and inflation, then it is a direct levy on the real value of capital. If a man owns a factory worth one million dollars, and there is a fifty percent devaluation of the dollar, the value of his factory in dollars will increase. He will pay a huge capital gains tax on the increase. Yet he will not have increased his real holdings by one cent. By the amount of the levy, his share of the nation's wealth will be directly reduced.
The possibilities of this sort of levy are immense. In a large inflation, a rich man might have the greater part of his fortune expropriated. In an inflation such as the one Germany passed through after the war, even a small investor would suffer. If he owned a gold ring worth a little over a mark, he would make a mark profit of over a trillion marks, on which he would have to pay the tax. No wonder the threat of inflation scares American property-holders and forms a definite deterrent to recovery.
The only alternative for business men would be to hold onto their stocks and other properties, thus only suffering the taxes on their income. But the first pinch would destroy them utterly.
These cases, though exaggerated for the present inflation, have their present counterparts. The liquidity of capital has been seriously impaired. Huge levies have been made. Stock-holders and bankers and businessmen have been scared. Recovery has been retarded. But the custom of most Americans of thinking in dollars, and not in what dollars will buy, has allowed the administration to claim all sorts of improvements in business and industry and income which would turn out to be net losses were they measured in any real standard of value. Evasion of the facts, as Democrats were quick to say in '32, is unjustifiable. And the insidious subversion of the property system in this country is far more dangerous than the frank ravings of demagogues.