Subject: Obama's hidden tax heist
RAHN: Obama’s hidden-tax
heist
Fed policy erodes productivity
gains
-
The Washington Times
Monday, December 24,
2012
How is it
possible that the government can spend almost twice as much as it takes in
without having high inflation? The fact is that over a long period of time, it
can’t. In the short run, which can be a few years, the government can paper
over its fiscal irresponsibility by expropriating most of the productivity
gains in the private sector through regulatory and central bank actions. This
is precisely what has been happening in the United States.
The reason real,
after-tax, per capita incomes have been able to increase year by year for most
Americans for the past two centuries is that productivity has been growing —
that is, the amount of goods each worker produces per hour has risen steadily.
The reason productivity rises is that workers tend to be better trained, the
amount of productive capital per worker rises, and there is a steady flow of
innovation, which reduces costs and improves goods and services.
To understand
productivity growth, look at the advances of farm and construction machinery —
which enable one worker to do more, better and with greater safety. Wal-Mart,
Amazon and FedEx
have made amazing developments in reducing distribution costs by instituting
better equipment and systems. Magnify these individual company and industry
gains throughout the economy, and the result is a steady national gain in
worker productivity.
Over the past few
decades, worker productivity growth has averaged more than 2 percent. Most of
this gain eventually ends up in worker paychecks, with some being siphoned off
to support people who are not working and pay for various government schemes. Even
so, for the quarter-century preceding 2007, after-tax, real
(inflation-adjusted) per capita, disposable income grew at about 2 percent per
year.
Since 2007,
worker productivity growth has slowed, in part because of the lack of new
investment. The big change has been that real, per capita, disposable income
has slowed sharply since the end of the recession, being less than 1 percent
per year, which has yet to make up for the 3.64 percent loss in 2009. By
contrast, in the three years after the end of the Reagan recession in 1982,
real, per capita, disposable income grew by almost 4 percent per year.
The recent gains
in productivity growth have been taxed away by government. The increases in
taxes are all non-legislated taxes, largely invisible to most people. First,
there is the inflation tax imposed by the Federal Reserve, which currently taxes away
about 2 percent of the purchasing power of the individual’s money each year.
There is nothing new in this tax; the Fed has been in the business of creating
inflation since it was formed in 1914.
What is new is
the big tax on savings, again imposed by the Fed. By artificially holding down interest
rates to lower-than-expected real market rates, the Fed is, in effect, expropriating interest
income (an implicit tax) that savers normally would be expected to enjoy. This
interest manipulation enables the government to fund its debt at less than what
would be real market rates at the expense of savers, making the deficit appear
much smaller than it really is.
There also has
been huge growth in the unseen “regulatory tax” over the past four years. A
regulatory tax is the cost of regulation imposed on the productive sectors of
the economy when the costs of the regulation exceed the benefits. The Obama
administration continues to ignore legislative mandates, both on comment
periods and cost-benefit analysis, for the tidal wave of new regulation that is
hitting businesses — and individuals.
The Fed also imposed the hidden tax of capital
allocation as a result of its artificial low-interest-rate policies. Simply
put, large institutions with strong balance sheets or companies that have been
designated “too big to fail” (a few major financial institutions) can obtain
all the loans they want at virtually zero interest. Smaller companies,
particularly new ventures, are being restricted in their ability to get funds
because of all the new regulations supposedly designed to reduce risk. Those
regulations have the same effect as imposing a high tax on smaller firms and
startups — which also happen to be the big job creators and innovators. In
effect, we have created a system in which small, innovative firms are being
“taxed” to subsidize large or government-favored enterprises.
Despite the fact
that the government (including the Fed) has managed to heist almost all of the
private sector’s productivity gains through hidden taxation, the amount of
continued deficit spending is too great to avoid a future great inflation. The
Obama administration has made it clear that it is not serious about reining in
spending. Its tax-increase proposals would not fund the government for more
than a few days at most and would do real damage to the economy. The
Republicans, rather than being unified and insisting on ending this scam, which
they could do by refusing to vote for all of the spending, seem to be content
to slightly slow the rate of the nation’s fall.
The bleak outlook
is that most Americans can expect a continued decline in their real, after-tax
incomes. History shows that at some time, the monetary bubble will burst. The
longer the Fed continues to mask what it is really doing,
the bigger the bust will be — only the exact day of reckoning is uncertain.
Richard W. Rahn
is a senior fellow at the Cato Institute and chairman of the Institute for
Global Economic Growth.
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