“A great civilization is not conquered from without until it has destroyed itself from within.” Will Durant
George Rebane
The ongoing rape of America by the evil party has more dimensions than just government induced inflation and higher taxes. Victor Davis Hanson gives a short yet comprehensive summary in his ‘The Subordinate Citizen’ of this unbelievable yet ongoing injustice against all Americans, perpetrated by our federal government under the Biden administration and the Pelosi/Schumer Congress.
In these pages we have covered extensively the impact of taxed inflation on investment returns, and made the quantitative case showing how inflation is an added tax that is confounded with the apparent IRS and state-quoted tax rates. The details are found here, here, and here.
In this little review I want to draw your attention again to the four important formulas that let you calculate the impact of taxed inflation on your own finances. These are given in the figure below. The image is from a spreadsheet tool I made that allows you to change the blue numbers denoting R, the nominal return on an investment, the inflation rate I during the investment, and the overall tax rate RT that must be paid when realizing the nominal return.
Here R = 10%, I = 8.5%, RT = 30%. Note that inflation reduces the effective return of the investment to RI = 1.38%. But now comes the hit. The 10% nominal return is taxed at 30% which further reduces the actual return to a negative 1.38%. This is what really happened to the buying power of every dollar you invested. Not only did you not make any money, you lost some. In this situation you would have done better by keeping it under your mattress. Your invested dollar now buys only 98.62 cents of stuff.
In this double whammy inflation/tax environment you need to make at least 12.14% just to maintain the buying power of your invested dollar. And, of course, 12.14% returns don’t come without any risk. Does that turn on any lights in liberal heads as to why the economy suffers under government induced inflation and rapacious tax rates? Since Karl Marx the answer has been a resounding NO. Socialists have no clue as to what causes inflation, and they all know that tax rates don’t impact economic behavior.
This preposterous situation arose because, as we see in the figure, the effective total tax rate, RET, in the above scenario turns out to be a whopping 113.82%, taking all you nominally gained and then some. And all of this outright larceny is so well hidden from the average Joe, that it doesn’t even make a visible ripple. Joe just bitches a bit about the high prices and that he’s not making enough money. His government tells him that it’s all the fault of the greedy corporations and the rich who don’t pay their ‘fair share’. Apparently this is totally acceptable, as witnessed by the comment stream below. But I may be wrong, and people really do care.
[10jun22 update] Lest you wage earners with no investment portfolios think that you have been spared – ‘fraid not. The inflation formulas above apply equally to your take-home pay. Suppose you’re fortunate enough to have gotten, say, a 10% raise and your overall pre-raise tax rate is 20%. We’ll let inflation stay at 8.5%. When you bring home that paycheck containing the raise, it’s exactly the same as if you sold your stock portfolio that has increased 10% at the end of the year. But fasten your seat belt, the results don’t look good.
Assume first that your overall tax rate stays at 20%. Then your effective raise considering only inflation turns out to be 1.38%. And taking out taxes reduces your effective raise into a pay cut of 0.46%. You would have required a raise of 10.63% to just maintain your wage’s buying power. When all is said and done, you have paid an effective total tax rate of 104.61%. In short, the government took from you more in taxes and buying power than your employer’s raise, and then some.
But what if your increased wages now put you into a higher tax bracket, say, at 22%? Then the above 1.38% remains unchanged, since it does not involve tax rates. But your former effective pay cut now increases from 0.46% to 0.65%. And now you would have required a 10.90% raise instead of the previous 10.63% raise to maintain buying power. Finally, your total effective tax rate has now increased from 104.61% to 106.45%. Oi weh!
We must always remember that government revenues increase during inflation because inflation pushes nominal wages into higher tax brackets, which for the consumer/investor is the monetary equivalent of a tax increase. And the final kick in the gonads is that the government knows that most average Joes out there don’t do numbers, and therefore to them the above discussion is boooring.
There’s also a Lucky Strike Extra for you fastidious number crunchers who have survived this far. Fiscally pernicious governments like ours, that purposefully create inflation by flooding the economy with new money not supported by increased productivity, they get a bonus by being the first able to spend the new cash (the Fed prints it and buys govt bonds from the Treasury) which always has the buying power that is subsequently to be reduced by the inflation caused by the new tranche of money into the economy. Inflation does not increase suddenly and in lock-step across a large economy like ours. It takes some time for the new cash to work its way through the various commercial highways and byways, bidding up the prices of what is bought by successive handlers of those new ‘crisp dollar bills’. Or is it ‘crisp dollar bits’?
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