Across The Board Tax Increases

Attention America: Your taxes are going up no matter who you vote for in November. They're already on the rise. They will affect everybody, but will especially hurt people whose incomes aren't going up, people on fixed incomes, people who save, and people of low income.

The tax I'm talking about is the silent tax of inflation--and there's nothing you can do about it. And there's little that the next President will do about it, no matter who he (or she) is.

Speaking recently at an economic forum, President Bush made the following statement:

"I guess the best to describe government policy is like a person trying to drive a car on a rough patch. If you ever get stuck in a situation like that, you know full well it's important not to overcorrect -- because when you overcorrect you end up in the ditch. And so it's important to be steady and to keep your eyes on the horizon."

Growing up in Northwest Arkansas, I drove on my fair share of icy roads, since we far more frequently got freezing rain than snow. The President is right--overcorrecting is bad news. I've been in that ditch before. What Mr. Bush forgets to tell us, however, is that the government spend billions of dollars on freezing equipment, froze the roads, and then poured water on them, and froze them again. Then they let just a little sunlight peek out, melt a small layer of ice into water on the top, while the underlying bit is still frozen solid. And now they are telling us that we need to be weary of overcorrecting.

There is one radical move that would not be an overcorrection, but a permanent correction: Get government out of our money and require a balanced budget.

Right now, the Federal Government has quite a racket going on with respect to our money (which is merely a medium of exchange for our labor, ingenuity, and valued goods. money itself has no intrinsic value). First, Congress and the President can go on a spending orgy, spending far more than they receive each year in revenue. The Federal Reserve and the Chinese government, meanwhile, snap up this debt by infusing more money into the US system.

Here's how that works:

The Federal Government borrows money through the sale of treasury bills. These treasury bills are things like U.S. Savings Bonds that are bought by the average person. This represents an extremely small proportion of our debt. Most of our debt is purchased on the open market by the Federal Reserve when it is trying to effect a lower interest rate and by foreign governments, sovereign wealth funds, hedge funds, and other institutional investors. When the Chinese government buys US debt, it first has to buy dollars with Yuan (the Chinese currency). This is beneficial (in the short-run sense) as it drives up the demand for dollars and helps keep the currency's value afloat. When the Federal Reserve does it, however, it is inflationary.

By increasing the supply of money in the open market through the financing of the Federal Budget Deficit and the National Debt, the Fed causes the relative value of our money to decline. This is inflation. This is what we are witnessing today. Gas prices are at a record, reaching $4 a gallon in many places. Crude Oil exceeds $111 a barrel. In the past four years, crude prices have jumped 270%. In the same period, demand for crude has only increased about 8%. Something is going on other than the Chinese driving more cars.

In January of 2001, the average price of a gallon of 2% milk was $2.85. Today, that price is $3.70. That's almost a 30% increase. Not coincidentally, that is the approximately the same increase in the value of the Euro against the dollar over the same period.

The Government measures inflation through two primary measures (at least these are the ones that get publicized): Consumer Price Index (CPI) and Producer Price Index (PPI). The CPI measures, primarily, inflation at the retail level, where the PPI measures it at the wholesale level. The graph below is based on CPI data published on the St. Louis Federal Reserve's website. It illustrates retail inflation since 2004.



It represents a roughly 13% rate of inflation since 2004. But something seems to be seriously wrong. The U.S. Currency has rapidly declined against the Euro in the same period, Gold has jumped to $1,000 an ounce, and oil is up 270%, yet the government's figures show only 13% inflation during that period. What gives?

Well, for one, the core CPI excludes the prices of food an energy because they are more volatile. It certainly does not measure against commodity prices like gold, either. Further, CPI attempts to approximate cost of living and measure against that. It is widely thought to inaccurately state these figures. Unfortunately, many argue that it overstates inflation, rather than understating it.

The reality, however, is that government, and especially the Federal Reserve, has a distinct incentive to mask the real effects of inflation. It keeps them their jobs. But the average American feels the squeeze. $4 at the pump, doubling grocery bills, not to mention the rapid increase in the prices of cars, health care, etc.

In spite of this ignored tax, the Democratic Presidential candidates want to raise income taxes even more, corporate taxes too. What those who support such policies fail to understand is that such tax increases have other effects on the economy. An increase in corporate taxes (which are already among the highest in the industrialized world) does not mean they will pass the tax along to the consumer. The consumer won't pay. They don't have limited resources either. So what the corporations will do is lay people off. They will most likely lay off middle management and the people at the lowest end of the pay schedule, the latter of which is precisely the group that these tax increases are supposed to benefit through government spending on health care and education.

Right now, however, I'm more concerned about the across the board tax increases through monetary inflation than I am about what Sens. Clinton and Obama are proposing. There is at least a chance of a tax revolt if they enact their plans. Yet the silent tax of inflation will keep on slicing the Average American's disposable income, penny by penny. Sadly, it will tkae a period of hyperinflation before people realize what's happened to their money.

I will close today with an image from history--the Weimar Republic, which was the government that ruled Germany during the Inter-war period had notorious hyperinflation, where people ran to the grocery store with wheel barrels full of money, rushing to get there before prices went up. Here is a picture of what worthless money looks like. In the days of electronic currency, we won't have this problem. Just an ever-increasing number of zeros after prices, and an ever-decreasing number of zeros after our income.