Inflation and Taxation - A Double Whammy

The government primarily uses taxation and inflation to seize money from its subjects.  You could also include debt, but really that is either a form of taxation or inflation, or else it is money voluntarily turned over to the government.

There are literally thousands of different taxes that we pay.  Some are obvious like income taxes and payroll taxes.  Common local taxes are sales taxes and property taxes.  But there are a lot of small ones and hidden ones.  There are gas taxes, both at the federal and state levels.  There are hotel taxes.  There are phone taxes.  There are taxes on electricity and water.  There are corporate taxes, that we all pay for indirectly, even if we don't own a company.  There are taxes on investments.  There are "fees" that are really taxes.  These can include car registrations, fishing licenses, parking permits, etc.  Again, the list of taxes at all levels of government are virtually endless.

Then there is the hidden tax of inflation.  It subtly and slowly (and sometimes not too slowly) devalues your savings.  You can have money just sitting in your wallet, and it is indirectly being taken away from you without you touching it.  While most people understand that prices go up almost every year, not everyone understands the reasoning.  Not everyone understands that an overall increase in the general price level is a result of monetary inflation (unless there is a short-term decrease in the demand for money).  This can all be pinned down on the government and the Federal Reserve.

The crazy thing is that the government actually uses taxation and inflation together to seize even more wealth from its productive citizens.  Although incomes do tend to go up with inflation, they tend to lag behind many consumer prices.  Therefore, most people are paying higher prices before they actually make more money.  But to add icing onto the miserable cake, higher income from inflation can actually push you into a higher tax bracket, thus paying more taxes.

But here is what I see as the worst combination of taxation and inflation.  Let's say that the price inflation rate is 4%.  Let's also say that interest rates are paying 4%.  The real interest rates are then at zero (interest rate minus inflation rate).  So let's say you put $10,000 into a money market fund.  After one year, you earn $400.  But your $10,000 can no longer buy what it could last year.  Your $10,400 this year is worth the same as your $10,000 from last year, in terms of purchasing power.  So you have saved this money, yet you haven't earned any return on it.  And here is the worst part.  You now owe taxes on the $400 that you "earned".  If you have to pay 25% in taxes, you will only be left with $10,300.  In inflation adjusted terms, you have actually lost money.

It is even worse if the inflation rate is higher.  It is also worse in a situation like today, where real interest rates are negative.  Even pushing aside the taxation issue, interest rates will not even pay enough right now for you to keep even with the inflation rate, even using the conservative CPI number used by the government.

It would be the same thing if you invested in gold.  If you bought an exchange traded fund (ETF) for gold (GLD) and later sold it for a "profit", you would have to pay a high tax rate on the earnings.  (GLD is taxed at a higher rate than stocks, as it is considered a collectible and is taxed at 28% if held longer than one year.)  But again, much of that so-called profit might have just been a result of inflation.

The issue of inflation is so vitally important because it is allowing the government virtually unlimited power and it is secretly ripping people off.  We must End the Fed.  To do this, we must start by legalizing competition.  One of the primary goals for libertarians should be to repeal the legal tender laws.  The Fed needs some competition and it needs to be put out of business.