Not Tax Deductible
February 5th, 2009
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Question: Why is the inflation rate not tax deductible?
Its a financial loss. If you have 100,000 dollars in the bank and your bank pays out 1% interest you lose money. The banks interest rate is below the inflation rate. So after one year that 100,000 turns into 101,000 right? Well say that was from the yaer 2006. Well in order to buy something that once cost 100,000 dollars in 2006 will now cost 104,000 in 2007. So its a loss of 3,000 dollars. Why is’nt this loss tax deductible?
Answer: Partially because the extra income from Tax Deductions only adds to further inflation- its more disposable income floating into the open economy.
The official answer, however, is that inflation is built into the market as a function of microeconomics. For a bank to profit from your savings use, it must payout the minimal acceptable interest to consumers and charge the most in its own interest for loans it extends- this is the differential. The bank will of course tell u that the “account holding fees” are responsible for the sub-inflation interest.
But this is again what consumers are willing to deal with. If inflation jumped to like 5 or 6% annually, u can bet everyone would be pulling their funds out and investing in safe, but inflation-matching funds like muni bonds or T-bills.
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