Friday, 21 June 2024

By Nick Hubble Editor, Strategic Intelligence Australia

[4 min read]

Dear Reader,

The Aussie tax return time approaches.

Let’s hope you get a refund. Here’s the thing…

There’s a tax you don’t even know you’re paying…and it’s a big one!

I’m talking about the inflation tax. The RBA’s inflation calculator tells us inflation was a cumulative 15.8% between 2020 and 2023. Or 5% per year on average.

No doubt you’ve noticed. And you probably think 15% is a laughable estimate. The cost of living has soared multiples that. Especially if you have a mortgage.

But how is inflation a tax?

Let me count the ways…

1. The Fiscal Drag Queen and bracket creep are pickpocketing you

Inflation pushes your wages up into higher tax brackets. There’s a de-facto tax increase by indirect means.

Economists have invented all sorts of obscure terminology to describe this effect. The Americans call it ‘bracket creep’. They call it ‘fiscal drag’ in the UK.

The Australians can’t make up their mind between the two. And I reckon the Irish would call it ‘tax distillation’ because of what it does: it makes the same tax rates more potent.

How much more potent? The Australian Parliamentary Budget Office did the maths for the next decade.

They estimated bracket creep would amount to $276 billion in higher tax revenue, or 8.1 per cent of GDP!

If you’re paying attention to recent politics around helping families with the cost of living, you might want to know this too:

‘The impact of the Stage 3 tax cuts will be more than offset by bracket creep by 2031-32.  In that year, the tax cuts are estimated to cost just over $30 billion, while bracket creep is projected to have added $57 billion in additional revenue.’

More and more of your income is getting taxed at higher and higher marginal rates. That shift is inflation.

But it’s not just your income that gets taxed by inflation…

2. Taxing capital gains caused by inflation adds insult to injury

Capital gains tax is paid when your make a profit on the rising value of your investments. But what if that increase is because of inflation?  

By devaluing money, the price of assets goes up. But their true value hasn’t changed. And yet, the increase is still captured by capital gains tax.

Sure, your stockmarket portfolio might’ve gone up 15% since 2020. But so did your groceries. And energy bill. And car insurance. And everything else. If you believe the government’s statistics…

The ‘real’ gain in that example was 0%. But you still need to pay your Capital Gains taxes on the 15% increase, as if your purchasing power was higher.

Thus, the government uses inflation to goose its capital gains tax revenue in a deeply unfair way. People are getting taxed for the falling value of their money!

3. The oldest tax off the books

Economists have written about something called ‘seigniorage’ for centuries. It’s another inflation tax. But only indirectly.

Inflation doesn’t float all boats equally. It’s more like the ripples in a pond. It spreads, hitting each one of us at different times.

We understand that creating new money causes inflation. Governments usually get to spend the new money first. This means they spend it before prices have gone up.

You and I, however, spend our money after prices have gone up due to inflation.

This difference is known as seigniorage. And it’s precisely what happened during the pandemic.

Prices surged before wages did when the government handed out extraordinary amounts of pandemic spending. The government got value for money. We got higher prices. And our wages only rose long after prices did.

Don’t believe me?

That sums up three ways inflation taxes you. But notice just how insidious it is. How many Australians know inflation is a tax? How many know the government benefits from inflation? 

Inflation is a pickpocket’s way of raising taxes. There is no announcement, law or political debate. You don’t know your money’s gone until you try to spend it at the shop. Instead of having less money, prices have gone up. Same difference, in the end.

But if inflation is a tax, that begs the question: what if the inflation we experienced was deliberate? What if it was an attempt to repay the debts we incurred during the pandemic? And what if this is just the beginning of a decade of decimation?

If you’re as worried as I am, click here. If not, you should be.

One last thing. If you don’t believe that inflation is a tax, consider these quotes from several famous economists (and one politician). They couldn’t agree on anything. Except that inflation is a deliberate tax levied by the government on you…

‘By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.’

John Maynard Keynes

‘There are only three ways to meet the unpaid bills of a nation. The first is taxation. The second is repudiation. The third is inflation.’

Herbert Hoover

‘It is a way to take people's wealth from them without having to openly raise taxes. Inflation is the most universal tax of all.’

Thomas Sowell

‘Inflation is taxation without legislation’

Milton Friedman

‘I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments.’

Friedrich August von Hayek

‘Avoiding inflation is not an absolute imperative but rather is one of a number of conflicting goals that we must pursue and that we may often have to compromise.’

Paul Samuelson

If you want to know more about how the use of the inflation tax could impact you for next decade, and how to try and evade it, click here.

Until next time,

Nick Hubble,
Editor, Strategic Intelligence Australia

Nick Hubble found us at Fat Tail Investment Research in 2010 after a stint inside Wall Street’s most notorious bank, Goldman Sachs, during the 2008 GFC. That’s where he saw the true nature of the investment banking business. Since then, he’s been the editor of the Daily Reckoning Australia and the UK-based Fortune & Freedom and Gold Stock Fortunes.

He’s delighted to work as Investment Director and Editor for Jim Rickards’ Strategic Intelligence Australia. Here he helps turn Jim’s big-picture views into specific actionable advice and ideas for Australian investors.

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

‘The assertion that men are objectively equal is so absurd that it does not even merit being refuted.’ 

Vilfredo Pareto 

This just in, MSNBC: ‘CBO: Increased Immigration will boost US growth’. 

Once again, statistics take on a life of their own... and become a policy goal. 

We listened to the talking heads explaining it. A young woman declared that US fertility rates were declining. She seemed to think this — another statistic — was cause for great concern. 

Who will pay taxes? Who will increase US GDP growth? Where will we get our teachers, firemen, and hedge fund managers? Who will pay the interest on our national debt... now more than $1 trillion per year? 

So many dumb ideas...so many silly numbers. America’s elites created a debt-drenched economy that needs growth — in credit, in sales, GDP and tax revenues — just to stay in business. And now we need to have more children...and open the borders, say the public policy experts, in order to pay for past policies.   

“American women have only 1.6 children,” explained the authority. (Another statistical mirage... we’ve never met a couple with 1.6 children.) “We need two children per couple, just to stay even. We’ll have to make up the shortage with immigrants.”  

There are 330 million people in the US. But we need more! 

Spare a thought for the poor Swiss. Yes, they live longer. They have more money. They are not involved in foreign wars. They have little crime. Their streets are clean and safe. Their borders are orderly. 

But...Swiss women have only 1.5 children...and the Swiss GDP is only 2% of US GDP. And if every penny of Swiss GDP were put to the task it wouldn’t even pay the interest on our debt pile. 

Keeping the show on the road — with more spending, more debt, more firepower…and now, more immigrants — is the main goal of US elites. Policy choices follow.  

Elitism

Two weeks ago, we laid out one of our ‘shared secrets’. Today, we give you another one: elitism. Excess immigration may actually lower wages and living standards for the average American. But immigrants are a source of low-wage labour...and help the system survive. The elites are for it. 

It is not flattering to be called an ‘elitist’. It generally signals that you think you are better than others...and should be granted special privileges. 

Here, we use the word in a purely descriptive manner. Elitism is not a disease... it is not a sin... it is not a mistake. It is just how societies operate.  

Our guiding light in this regard is the great Italian economist, Vilfredo Pareto. You probably know him as the author of the 80/20 rule. Always and everywhere, he said, 80% of the work will be done by 20% of the people...80% of your profits will come from 20% of your investments...etc. 

No matter what you call your government, there are always a few people — an elite — that actually runs things. Louis 14th, for example, was an ‘absolute monarch’. But Louis did not collect his taxes himself...nor win his wars...nor design and stitch his uniforms. His rule was made possible by what Javier Milei calls the ‘casta politica’ — the political caste.  

Likewise, they were the apparatchiks and nomenklatura who ran the Soviet Union. And they were the Nazi Party members who ran Hitler’s Germany.  

Today, in the US, we have politicians, lobbyists, CEOs, influencers, economists, kibitzers and hobnobbers. They allow citizens to vote...often with surprising and disruptive results. But the main decisions and lasting policies are determined by the elites. They control the public conversation. 

A widening canyon

Typically, when a society is new, and/or small...there is little difference between the elite 20% and the rest of the population. They are neighbours, friends, business associates...the parish priest...the local judge...the small-town mayor.  

But over time, the elites pass more and more laws... and write more and more regulations... gradually gaining more and more control over the rest. Gradually, too, their views and interests diverge.  

That is what happened in France before the revolution. The aristocracy grew more and more distant from their own properties...and from the lives of their tenants and peasants. They lived in great splendour, wearing precious silks and velvets...and eating sumptuous meals (even while millions of ordinary people — in the 1780s – shivered and starved). They granted themselves special privileges...and even exempted themselves from taxes. 

Eventually, the divide between the elite and the rest of the people became intolerable. The guillotine solved the problem. 

How will the widening canyon, between America’s elites and the “little people,” be closed?  

Tune in next week. 

Regards,

Bill Bonner,
For Fat Tail Daily

PS: Australia's 'Decade of Decimation' is staging a comeback. Skyrocketing inflation, plunging stocks, and a cost-of-living crisis are on the horizon. Discover our 'Decade of Decimation Survival Strategy' and learn how to safeguard your wealth — plus the investments set to shine in the turmoil ahead.