Some Lawmakers Seek to End Capital Gains Tax on Gold

A tax on capital gains from the sale of gold is a tax on inflation. That sentiment is the underpinning of Republican Ron Paul’s arguments for a gold tax exemption in Arizona. The 2014 bill comes from Rep. Mark Finchem.

Paul urged the state Senate in Arizona to tax citizens “more honestly” while arguing that it’s unfair to punish people for attempting to safeguard against inflation.

The argument is timely. In February consumer inflation exceeded the Federal Reserve’s targeted annual gain of 2%. The trend marks a welcome departure from the unemployment and excess capacity that slowed the economy in previous years. Fed Chairwoman Janet Yellen was clear in her March press conference. “We expect core inflation to move up,” she remarked.

The importance of this 2% milestone is significant. The U.S. still experiences reverberations from the global financial crisis nearly a decade later. Inflation has been below 2% since May of 2012. Many gold purchasers keep a close eye on such figures. Gold has become more attractive for investors in our low-rate environment. It’s easier for investors to ignore interest-bearing instruments for gold when yields are depressed. Moreover, recent equity market volatility amid a tumultuous new administration will likely invigorate interest in gold. There is no perfect inverse relationship between stocks and gold. However, the commodity is useful as a diversification strategy. “You need to have the insurance when the fire happens,” remarked the CEO of one gold ETF firm.

Paul, however, met with resistance while testifying before the Senate Finance Committee. Democratic Senator Steve Farley from Tucson dismissed statements from Paul calling the measure merely a “tax giveaway to coin collectors.”

The pivot point in the debate centers on face value. While Paul argued that it’s illogical to tax money, Farley countered that a coin with a $20 face value is worth far more today. Speculators who are choosing gold as an investment, he claims, should be taxed just like those owning stocks and bonds. Paul maintained that stocks and bonds are different because they aren’t money. It appears the argument did not convince Farley.

The debate illustrates two different perspectives. Farley contends that over the decades gold has risen in value. Paul, however, remains firm that the inherent value of a gold coin is unchanged. Paul believes that the price appreciation of a coin is merely a relative measure; the coin hasn’t increased in value. Instead, paper money has dropped he argues.

Beneath the philosophical musings of Paul and Farley are likely more pragmatic impulses. Perhaps Paul and his constituents have personal financial stakes in the outcome of a lesser tax burden. Meanwhile, Farley, if ultimately unsuccessful may see a significant drop in state tax receipts.

The bill passed the House and eventually received a 4-3 vote approval in the Senate Finance Committee. The next hurdle will be the full Senate where some remain opposed. Similar measures have seen success in other states. In March of this year, the Idaho House of Representatives voted to end all state taxation on gold and silver by a 56-13 margin.