What financial aspect does tax drag increase with?

Tax drag refers to the reduction in overall investment returns due to the taxes imposed on income generated by an investment, such as interest, dividends, and capital gains. As the return on an investment increases, the taxes owed on that income don't rise in a linear fashion; rather, they often compound with time and the increasing magnitude of returns.

When an investment has a higher return, it generates greater taxable income, and this leads to a greater impact from tax drag. Additionally, as the investment is held over a longer time horizon, the compounding effects of both the returns and the taxes on those returns become more pronounced. This means that longer investment periods that generate higher returns will experience a more significant tax drag, ultimately affecting the net returns that an investor takes home.

In contrast, investment diversification, tax deductions, and inflation rates, while relevant in assessing overall investment strategies and outcomes, do not directly correlate with the increase in tax drag in the same manner that higher return and time horizon do. Therefore, the consideration of tax drag fundamentally hinges on understanding how both return and time interact to amplify the effect of taxes on investment performance.