Keeping toilet paper around could pay off in the long run. (JUAN ARREDONDO / NYT)
If you think that real estate or oil wells are the best tax shelters, guess again.
The best shelter is hoarding toilet paper — or toothpaste, canned food, underwear, and any consumer good that can be stored for an extended period of time. If you are short of space, you should store either expensive items, like liquor, or small items, like “forever” stamps, garbage bags, soap bars, razor blades, or dental floss.
There are many advantages of buying consumer goods in bulk. First, you may get a bargain price because of either a volume discount or the ability to stock up during sales.
Second, your inventory of consumer goods should appreciate over time with inflation, a relatively attractive return.
Third, both the above increases in wealth (the savings by buying at discount and the appreciation of the inventory) are not subject to income tax.
The following example demonstrates the advantage of hoarding: Suppose you purchase $100 worth of toilet paper at a sale price of $90. You have just made $10 tax free. If your combined marginal state and federal tax bracket is 331⁄3 percent, that $10 is equivalent to $15 of salary.
If you keep this $100 worth of toilet paper in your garage and never use it, the toilet paper is just like any other investment.
Were inflation to continue at the rate of two percent per year, the general level of prices would go up approximately 10 percent in five years, and the toilet paper would be worth about $110.
Were you to sell the toilet paper for $110, you would have to pay tax on the appreciation. Nevertheless, you can avoid tax on the gain by “selling” the toilet paper to yourself and gradually using it up. With the storage space liberated, you could take a daring position in another commodity — paper towels, for example.
Instead of buying the toilet paper on sale and holding it for five years, had you put the $90 in a five-year savings certificate with a 1.5 percent annual interest rate, you would have earned roughly 7.7 percent before tax, and about 5 percent after tax (assuming a 331⁄3 percent marginal tax bracket).
In five years, your $90 savings would have grown to approximately $94.50. This is far less than the $110 value to which the toilet paper would have appreciated.
If you had bought $90 worth of gold or securities that appreciated to $110, you would have to pay capital gains tax on the $20 “gain.” Therefore, you would still end up with less than the $110 value of your toilet paper “investment.”
The analysis is not altered if you “freshen” your hoardings by substituting newly purchased items for older ones and then consume the older goods. For all practical purposes, your “investment” remains untouched and continues to appreciate.
Of course, using up your inventory takes time, in contrast to the liquidity of a savings account. Furthermore, the amount of your storage space limits your ability to hoard.
But where else can you find an investment that is absolutely safe, keeps up with inflation, and generates tax-exempt returns?
William K.S. Wang is a professor at the University of California Hastings College of Law.
This piece originally ran in the San Francisco Chronicle.