What the loop costs

The loop has a price, and the government’s own analysts have measured it in the years they could. In every year measured, a large share of the tax on capital gains fell on inflation: a quarter of the revenue in fiscal 2017, a third in 2012, about half of the base in 1993, and in 1973, on corporate stock, gains that were real losses. No source opened totals it since 1913; the years below are the years measured. Congress can cure it as it cured the same effect in the rate brackets in 1981: by a Bill, which must begin in the House.

The years measured

What the economists said · A tax ought to be certain

Adam Smith set the rule for an honest tax in 1776, in his second maxim: “The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.” He put certainty above equality: “The certainty of what each individual ought to pay is, in taxation, a matter of so great importance that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty.” Of a state that pays its debts in a cheapened coin he wrote: “The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment.”

John Maynard Keynes described the other kind of tax in 1919: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.” In 1923 he headed a section “Inflation as a Method of Taxation” and opened it: “A Government can live for a long time, even the German Government or the Russian Government, by printing paper money. That is to say, it can by this means secure the command over real resources,—resources just as real as those obtained by taxation.” Of its reach: “It is the form of taxation which the public find hardest to evade and even the weakest Government can enforce, when it can enforce nothing else.” Smith’s tax is certain and not arbitrary; the tax Keynes names is secret and arbitrary. F. A. Hayek, in Denationalisation of Money: “I do not think it an exaggeration to say that history is largely a history of inflation, and usually of inflations engineered by governments and for the gain of governments”.

Robert Murray Haig, in The Federal Income Tax (1921), found the loop inside the measure of income. Counted in money, “it is clear that his income will reflect every change in the value of money between those two points of time”. Then: “If the level of prices goes up ten per cent, the money value of my assets will ordinarily follow at a like rate. That particular increase in value does not really indicate an increase in my economic strength. My power to command economic goods and services has not increased, for the money-value of these goods and services has likewise increased.” And: “So long as we have a money standard which varies, we shall find that even a perfect accounting system will show a net income which is not identical with the true accretion of economic power. Indeed, the more perfect the valuation and the accounting, the greater will this injustice be.” He named the cure: “If it were possible to modify the concept of taxable income so as to eliminate this variation it would certainly be desirable to do so.” “But an approximate solution might be realized if we were able to evolve a satisfactory index of the level of prices.” He did not expect it soon: “But even this refinement is not likely to be introduced soon.” The Code now holds such an index for the rate tables, a “Cost-of-living adjustment” measured by “the C-CPI-U for the preceding calendar year”, which is “the Chained Consumer Price Index for All Urban Consumers (as published by the Bureau of Labor Statistics of the Department of Labor)” (26 U.S.C. § 1(f)(3), (6)). It holds none for basis.

The strongest reading against it: Keynes judged inflation the lesser harm: “Thus Inflation is unjust and Deflation is inexpedient. Of the two perhaps Deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier.” And the economists’ words settle what inflation does, not what the Constitution requires: “The income tax laws do not profess to embody perfect economic theory.” (Weiss v. Wiener, 1929). Haig’s cure, like the study’s, is Congress’s to enact: an index written into the measure of gain, by a Bill.

Wages and other income

Congress’s own name for the effect, “INFLATION-CAUSED TAX INCREASE”, describes an increase no Bill enacts: the tax is voted once, and the price level raises it every year after. Wages carry no basis, so inflation reaches them through the rate brackets, and Congress cured that in 1981: § 1(f) of the Code is headed “adjustments in tax tables so that inflation will not result in tax increases”. Other lines are written as fixed sums that no paragraph adjusts:

• The tax on net investment income begins above “the term “threshold amount” means— (1) in the case of a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), $250,000, (2) in the case of a married taxpayer (as defined in section 7703) filing a separate return, ½ of the dollar amount determined under paragraph (1), and (3) in any other case, $200,000.” (26 U.S.C. § 1411(b)).
• Social Security benefits enter income above a base amount: “(A) except as otherwise provided in this paragraph, $25,000, (B) $32,000 in the case of a joint return” (26 U.S.C. § 86(c)(1)).
• Both sections were read whole, and neither adjusts its sums for inflation. As wages and prices rise, more income crosses lines the law never moves.
• Interest is taxed whole: “The Stellys’ contention that they are entitled to an inflation adjustment to their interest income is plainly incorrect.” (Stelly v. Commissioner, 5th Cir. 1986).

The money the Fed creates

From December 11, 2025, the Federal Open Market Committee directed its desk to “Increase the System Open Market Account holdings of securities through purchases of Treasury bills and, if needed, other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves.” The New York Fed says the purchases “increase the size of the Fed’s balance sheet and the amount of reserves in the banking system”, and that “The Desk has conducted RMPs at a monthly pace of $40 billion since mid-December”. A purchase that increases reserves pays in reserves that did not exist before it. Over fiscal 2026 the Fed’s Treasury holdings grew by 18.1 percent of the deficit (The facts).

The Fed’s income returns to the Treasury only when it has income: “As of March 25, 2026, the Federal Reserve System reported a consolidated deferred asset of $244 billion in connection with accumulated negative net income.” That week, “Weekly remittances to the Treasury were made for the week of March 25, 2026, as net income at three Federal Reserve Banks was positive.” The pace of the dollar’s fall is the committee’s own “judgment that inflation at the rate of 2 percent” … “is most consistent over the longer run with the Federal Reserve’s statutory maximum employment and price stability mandates.”

Why taxes, if money can be made

The Constitution grants the powers side by side and conditions none on another: “To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States”; “To borrow Money on the credit of the United States;”; “To coin Money, regulate the Value thereof”. Congress has made money that bears no interest: the notes of 1862 “shall also be lawful money and a legal tender in payment of all debts, public and private, within the United States, except duties on imports and interest as aforesaid.” The Court has held that “Congress may constitutionally authorize the emission of bills of credit” (Veazie Bank v. Fenno, 1869), and that whether to resort to it “is a political question, to be determined by Congress” (Juilliard v. Greenman, 1884).

A nation that issues its own money does not tax chiefly to obtain it. In 1946 a chairman of the Federal Reserve Bank of New York wrote that “Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity.” The first purpose he gave federal taxes: “As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;” (Beardsley Ruml, “Taxes for Revenue Are Obsolete”, 1946, as reprinted). On his account, taxes hold the dollar’s value, and the tax on a nominal gain charges the holder for the value the dollar lost.

A cure proposed in 1932 · Sy Foster’s amortizing free currency

Sy Foster’s Ten Letters from an International Banker to His Son (1965) is a satire: letters from a fictional banker, dated 1932, that quote Foster’s own proposal in order to mock it. The proposal answers the question above: money issued by the Treasury, free of interest, paid out for the nation’s work.

• The notes. “A $100.00 greenback, issued by the government for labor and/or materials furnished to the government, and made legal tender ‘receivable for all debts, both public and private’ could have twenty (or any other convenient number) of blank squares printed on the back, each square corresponding to one of each consecutive years.”
• The stamp. “Each year, one of these squares would have to be filled in with a government frank affixed by the post office or other designated government agency upon the payment of $5.00 by the holder of the bill in order to keep the $100.00 bill up to its full face value.” Twenty stamps of $5 retire a $100 note, and no one gains by hoarding it.
• No interest. The medium of exchange “must be free from interest or usury impediments and on an equal basis with other forms of property, i.e., it must be made to assume its just share of the burden of taxation with all other forms of taxable property.”
• The supply. “Money must be kept flexible enough to follow increasing business. Its volume should be the measure of production, not consumption. When production increases, money should increase in like proportion.”
• The model. Guernsey, whose mayor, asked to borrow for a market house, answered: “‘Very well,’ said De Lisle, ‘that is very simple, we will make the money. What amount will be required?’”

What the words say about it. Congress may issue such notes (“Congress may constitutionally authorize the emission of bills of credit”, 1869), and whether to resort to them “is a political question, to be determined by Congress” (1884). Foster’s cure, like the study’s, is a Bill.

What the book’s quotations bear. The letter it prints as Lincoln’s, “I have long determined to make public the origin of the ‘greenback’ and tell the world it was one of Dick Taylor’s creations.”, is not a receipt: “The Collected Works of Abraham Lincoln (Volume VIII, p. 570) categorizes the purported letter as “spurious.””, and the historian Thomas F. Schwartz writes that “the original has never been located” (SangamonLink, 2024). The book also prints an editorial it credits to the London Times and a circular of 1862 it credits to a London banker named Hazard, each without date, page or issue; no original was opened, and neither is quoted here.