Sounds like there's 3 main questions here:
- Assuming inflation is not included in investment returns, should inflation be included in expense?
- How should taxation on investment returns be calculated? 4% or the after inflation 7%.
- Should inflation be included everywhere?
For #1, the important thing is to be consistent and include inflation in NEITHER returns nor expenses, or BOTH. Generally neither is simpler and relies on fewer assumptions, so I'd recommend that. Of course, depending on your personal situation, you may vary/increase your annual expense figure for other reasons.
So for #3, that makes the answer no. It can be, but you don't have to.
Inflation on investments/expenses is relatively straightforward, but for taxes (#2) things get trickier to understand, though I suspect you're still okay. In Canada, the tax brackets get adjusted for inflation every year, so what you pay as a % on 50k today, would be the same % on 50k+inflation in the future. If you have the same or a similar setup, then you can ignore inflation for tax purposes as well.
Does that make sense? I'm not sure on the details of how #2 works though, so hoping someone already FIRE can chime in there more.