Benjamin Franklin said, “The only things certain in life are death and taxes.” Most people think of taxes as the money withheld from their paycheck or the money owed at the end of the year to Uncle Sam for wages earned. There is just so much more to it. With more than 73,000 pages, there is no doubt that the U.S. tax code is complicated. There is virtually a tax for everything: income tax, payroll tax, property tax, sales tax, estate tax, etc. Some may apply to you and many will not, but there is one “tax” that applies to everyone, especially in the U.S. This tax is arguably the most devastating tax in existence and is not even mentioned in the tax code; simply, it is one of the most powerful forms of taxation that can be executed without statute. It is a “silent tax” that everyone must pay…INFLATION.
Inflation is the loss of purchasing power of your dollar, or more simply put, it takes more dollars to buy the same goods. For example, inflation is evident when a $1 loaf of bread costs $2, or a $1 gallon of gas costs $3; same bread, same gas, but it takes more dollars to buy it. So how can inflation be considered a tax? We’ll get to that soon enough.
Under the Gold Standard, U.S. Dollars were attached to gold at a fixed price. For example, $100 could be a fixed priced for 1 ounce of gold, and therefore $1 would be worth 1/100th of an ounce of gold. This was very helpful because you didn’t have to carry around gold coins at various weights/mass to purchase goods, you could conveniently carry the cash equivalent. Most importantly, the Federal Reserve could only print the amount of dollars equivalent to the amount of gold reserves in the U.S. Treasury; in other words, U.S. Dollars were backed by gold. In 1971, President Nixon removed the U.S. Dollar from the Gold Standard thereby turning the U.S. Dollar from money equivalent to fiat currency [legal tender, not money, that has no intrinsic value and is not backed by reserves]. Historically, most printed money was based on physical commodities such as gold but fiat currency is based solely on faith. Because fiat currency is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose their faith in a nation’s paper currency, the money no longer holds any value. Today, no country uses a gold standard, every country uses fiat currency. The main point is that after the Nixon Shock of 1971, the Federal Reserve was and still is allowed to print as much U.S. Dollars as they see fit with nothing at all to back it.
---Notice the U.S. Dollar use to read, "This certifies that there is on deposit in the treasury of The USA. This CERTIFICATE is legal tender for all debts public and private." Now the dollars read, "This note is legal tender for all debts, public and private."---
---Zimbabwe Billionaire--- What happens when fiat currency [e.g. U.S. Dollars] is printed? The currency can be devalued quickly especially in a modern market were currency is not backed by anything. For example, printing twice as many dollars makes all dollars worth half as much. In short, PRINTING = INFLATION. There are 21 countries in the past 25 years that have experienced hyperinflation leading to a severely devalued currency (see a complete list here).
In the year 2000, the National Debt for the U.S. was $5.6 trillion. From a different perspective, it took 224 years (the U.S was founded in 1776) to amass $5.6 trillion of debt. By 2008, our national debt soared to $10.2 trillion; in only 8 years we doubled a debt that took 42 presidents, a great depression, two world-wars, and several other notable events to accumulate. The response to this shocking truth (and the 2008 financial crisis) was to print U.S. Dollars; solve the financial problems by printing money out of thin air and paying it off. Before 2013 ends, our national debt will have exceeded $17 trillion and, to stimulate the economy, the Federal Reserve is currently printing [quantitative easing] U.S. Dollars at a rate equivalent to $1 TRILLION per year.
In the year 2000, the National Debt for the U.S. was $5.6 trillion. From a different perspective, it took 224 years (the U.S was founded in 1776) to amass $5.6 trillion of debt. By 2008, our national debt soared to $10.2 trillion; in only 8 years we doubled a debt that took 42 presidents, a great depression, two world-wars, and several other notable events to accumulate. The response to this shocking truth (and the 2008 financial crisis) was to print U.S. Dollars; solve the financial problems by printing money out of thin air and paying it off. Before 2013 ends, our national debt will have exceeded $17 trillion and, to stimulate the economy, the Federal Reserve is currently printing [quantitative easing] U.S. Dollars at a rate equivalent to $1 TRILLION per year.
---The U.S. Top Tax Rate Average is 61%.--- It all comes down to difficult choices. When our debt doubled between the year 2000 and 2008 the U.S. had two options (and yes, these options are oversimplified purposely as to not distract from the point of the message):
1.) Raise taxes drastically (the top tax rate in the U.S. in the 1950s was 90%!) to help pay off the new debt over time, A VERY UNPOPULAR CHOICE or
2.) Borrow more money [to pay the minimum payment on existing debt and meet the minimum obligations (e.g. social security, unemployment benefits, etc.)] AND print money [to stimulate the economy].
It’s a much greater challenge to raise the tax rate to more than double what it is today and would cause a huge uprising from American citizens. Option 1: Imagine the uproar if a citizen that earned $100,000 was ordered to pay 50% in taxes which would only leave him/her with $50,000 of purchasing power. Option 2: A near equivalent alternative would be to allow the citizen to pay the same 28% in taxes that he/she did before the crisis and debt surge which would leave the citizen with $72,000 after tax; AND print money possibly risking the $72,000 to eventually only be able to purchase $50,000 worth of goods, a “silent tax” of $22,000 or more WITHOUT uproar. In option 1 and 2 the citizen is left with $50,000 of after tax purchasing power, however, option 2 goes virtually unnoticed by most citizens and is therefore an easier option to implement.
Some inflation is natural in a healthy economy. However, when an entity can literally print currency out of thin air they can simultaneous create unhealthy levels of inflation which severely lowers YOUR purchasing power similar to how a typical tax lowers your purchasing power. Consider the devastating effects of inflation during 1978 to 1981 in the U.S., a time when inflation averaged 13.5% per year. That means that $100,000 safely tucked away in 1978 could only buy $59,000 worth of goods by 1982!
In short, one thing is for sure, inflation will continue over time. The good news is there are ways to hedge [protect] yourself from inflation. We always discuss disputably the greatest inflation hedge of all time at each of our events. Attend one of our events or give us a call to learn how to BEST beat the silent tax.
1.) Raise taxes drastically (the top tax rate in the U.S. in the 1950s was 90%!) to help pay off the new debt over time, A VERY UNPOPULAR CHOICE or
2.) Borrow more money [to pay the minimum payment on existing debt and meet the minimum obligations (e.g. social security, unemployment benefits, etc.)] AND print money [to stimulate the economy].
It’s a much greater challenge to raise the tax rate to more than double what it is today and would cause a huge uprising from American citizens. Option 1: Imagine the uproar if a citizen that earned $100,000 was ordered to pay 50% in taxes which would only leave him/her with $50,000 of purchasing power. Option 2: A near equivalent alternative would be to allow the citizen to pay the same 28% in taxes that he/she did before the crisis and debt surge which would leave the citizen with $72,000 after tax; AND print money possibly risking the $72,000 to eventually only be able to purchase $50,000 worth of goods, a “silent tax” of $22,000 or more WITHOUT uproar. In option 1 and 2 the citizen is left with $50,000 of after tax purchasing power, however, option 2 goes virtually unnoticed by most citizens and is therefore an easier option to implement.
Some inflation is natural in a healthy economy. However, when an entity can literally print currency out of thin air they can simultaneous create unhealthy levels of inflation which severely lowers YOUR purchasing power similar to how a typical tax lowers your purchasing power. Consider the devastating effects of inflation during 1978 to 1981 in the U.S., a time when inflation averaged 13.5% per year. That means that $100,000 safely tucked away in 1978 could only buy $59,000 worth of goods by 1982!
In short, one thing is for sure, inflation will continue over time. The good news is there are ways to hedge [protect] yourself from inflation. We always discuss disputably the greatest inflation hedge of all time at each of our events. Attend one of our events or give us a call to learn how to BEST beat the silent tax.
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