You still generally owe taxes as the interest is accrued. So, the situation doesn't change-- that CD loses money unless your tax rate is low.
Even with compounded interest not subject to taxation until withdrawal, it's not much better. Even in a ridiculous case with 30 years, 10000 * (1.05^30) = $43220 ; minus .4 * 33220 = $29932; 29932 / (1.032^30) = $11401-- or about .4% real return per year.
Opportunity costs beyond inflation make the picture even more ridiculous.
(10000 * (1.05^10) - 10000) * .67 = 4213. 14213/(1.032^10) = 10372; or about a .36% return.
Not surprising that a lower tax rate gets to the same number sooner through compounding.
BUt the bigger issue is that you have to pay tax on interest as it is accrued, not all at the end. So in your case there's a 3.35% return vs. 3.2% inflation or a .15% net return.
It doesn't matter when you withdraw the money, the taxes will be the same. $10k earning 5% compounded monthly will be $16,470 in 10 years. After paying 1/3 of the gains in taxes, you'll be left with $14,313 which has a present value of $10,446 at 3.2% inflation.
So yeah opportunity costs must be accounted for, but in your scenario the opportunity cost is negligible. We're talking 0.4% per year. Investing in a CD is like pissing in the ocean
But it's beside the point. The point is that opportunity costs must be accounted for.