Heres how the inflation tax works today.
No, it doesn't. When you report income on your tax return, you are taxed on it based on the year it was earned. That's it. You still pay your income taxes one year at a time even if your income doesn't change from one year to the next. The same holds true for the value of any tax deductions you take in any given year.
A capital investment is held for years -- even decades -- which means inflation is built into the underlying appreciation of the asset in a way that you don't see with income.
Personally, I think the investment banking industry loves this "inflation tax" on capital gains because it gives investors a big incentive to hold assets for shorter periods of time, meaning they're executing trades more frequently than they might have done otherwise.