There is an extra tax out that that many of us don’t even realize that we pay. It affects all Americans equally, yet it is not something we get to vote on. What I’m referring to here is inflation – a flat tax on your savings.
If you are not already aware, a flat tax is when one tax rate is applied to all levels of income. For example, if there was a 20% flat tax, the person making $20k a year pays the same tax rate as a person making $200k per year. This is not how taxes are today, where the tax rate paid varies depending on income level.
Progressives hate the flat tax idea for a straightforward reason – it disproportionally burdens poorer Americans. Taking 20% of the income from a person who lives paycheck to paycheck affects that person significantly more than a person earning millions of dollars per year. So a flat tax takes away income from all Americans equally, which predominantly hurts the poor.
What about inflation though?
Inflation, as you well know by now, is the idea that the value of money goes down over time, which in turn results as prices rising. So, just like a flat tax, all American’s have the value of their money fall by the same percent. And like a flat tax again, this mostly burdens the poor.
Price inflation is usually tracked by the CPI, a basket of goods that monitors specific prices over time. The CPI is valuable for tracking certain costs, but it doesn’t represent the devaluation of a currency. As a result, the CPI can be flat year to year, but your dollars are still losing value.
This can be a tricky concept to wrap your mind around – prices don’t have to go up for your dollars to lose value. Costs of goods and the value of a currency are not the same. Creating new currency (printing money) is inherently inflationary, but the price of goods rise and fall for many different reasons.
That’s kind of what’s happening today. Prices have remained relatively flat (until recently…), but dollars are losing value. All the extra money circulating has to end up somewhere, and where it’s ended up is in investable assets. Stocks, sports cards, real estate, ect; almost everything is at all-time highs now. That’s not CPI inflation, but it is dollar devaluation. If you have held your money in cash this whole time – money in a savings account – you are falling behind. Your piece of the pie is now smaller. Stocks aren’t going up in value, dollars are just going down.
Every new dollar that enters the economy reduces the value of every dollar already in existence. That is because there are a limited amount of goods and services in the world (for example, things like steel, food, wood, everything), and money is the system of accounting. Printing new currency doesn’t create any new value; it just redistributes value away from the people that already hold that currency.
In this way, inflation is a tax – a tax on savings. Whether it’s an expansionary monetary policy from Federal Reserve or deficit spending for something like an infrastructure bill or a new healthcare system – creating new currency is not a ‘something for nothing’ proposition. We aren’t getting stuff for no cost.
Just because a policy isn’t paid for with a tax doesn’t mean that it’s not paid for. New money, printed for whatever purpose, comes at the expense of the people who already hold the currency. These things are being paid for, through the dilution of your savings. It’s just harder to see.
If 10% more dollars are created – for whatever purpose and no matter what happens to the CPI – you should start thinking of your savings as being worth 10% less.
Like a flat tax though, the cost is spread evenly among all Americans. And just like with a flat tax, the burden tends to fall on those who can least afford it.
Sean Cover 