Pres. Obama Didn’t Tell Us About This Upcoming Tax – Taxation Without Representation

Many Americans are confused and depressed about the level of spending by President Obama and Congress and are understandably concerned because we have heard few explanations regarding how Obama and Congress intend on paying for all of these “reforms,” other than by increasing the marginal tax rates for the “rich Americans” that can afford to “pay their fair share.” The Obama Administration has boldly proclaimed that the Bush Administration tax cuts will be allowed to expire, the capital gains tax will be increased by 5%, and cap and trade policies will enact a heavy burden on all Americans (including the poor). In addition to the exploding deficits and the mind-boggling increases to the national debt, one must consider the additional consequences that rampant spending will have on everyday Americans. Once such consequence the Obama Administration has not warned Americans about is the upcoming tax that will plague most of us: the taxation without representation created as a direct result of inflation.

A number of economists, business leaders and the CBO (Congressional Budget Office) have addressed the reality that the current unprecedented spending will likely result in an overwhelming amount of inflation. So what does inflation have to do with taxation? We must first look at the concept of inflation and why we are headed down that path to understand how inflation affects taxation.

Milton Friedman described that “inflation occurs when the quantity of money rises appreciably more rapidly than output, and the more rapid the rise in the quantity of money per unit of output, the greater the rate of inflation.” Friedman explained that output is necessarily limited by the available human and physical resources and by the “improvement in knowledge and capacity to use them.” However, the ability of the Federal Reserve to print more money or to make bookkeeping entries that result in the increase in the quantity of money is subject to no real limits. Friedman’s comments are illustrated by the recent developments by the Federal Reserve, Pres. Obama and Congress regarding the printing of $1 trillion (in addition to the purchasing of outstanding government bonds through newly printed money), the multi-trillion dollar spending on the bank bailouts, the auto industry bailouts, the stimulus spending, the overwhelming spending proposals in Pres. Obama’s proposed budget (which would triple the national debt in 10 years), and discussions regarding additional bailouts and stimulus plans. Such questionable actions by Washington bureaucrats make it clear that Washington can only fund such spending through the printing of money. When the Federal Reserve establishes a policy of funding government spending through increasing the quantity of money, the value of the dollar is debased, resulting in higher prices for all products and services and lower buying power for all consumers (your money will buy less now than in the past because it is worth less). As John Maynard Keynes (Obama claims to be adhering to his economic philosophy) stated, “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Now to the tax implications related to all Americans. Inflation raises taxes in two ways: (1) increasing the quantity of money in the system forces Americans to increase the amount of money they have in savings or earn in income in order to buy the same amount of goods and services required to maintain their standard of living. Friedman explained, “The people who spent less than their income in order to maintain the purchasing power of their money balances (savings) have given up these goods and services in order that the government could get the resources (arguably for the government’s funding of spending projects); (2) inflation benefits and funds the government by effectively raising citizen’s tax rates. As inflation increases the cost of goods and services, employers are required to increase employee’s dollar incomes. As all American’s incomes are increased, more and more American’s (presumably middle-class Americans) are forced into higher tax brackets resulting in higher tax liabilities for American’s that have less buying power. Additionally, inflation creates higher prices for consumers due to the negative effects it has on corporate income – “Corporate income is artificially inflated by inadequate allowance for depreciation and other costs. On the average, if income rises by 10% simply to match a 10% inflation, federal tax revenue tends to go up by more than 15% - so the taxpayer has to run faster and faster to stay in the same place.” The cumulative effect of such taxation results in taxation without representation and produces damaging effects for each American.

Why would any politician advocate such policies that almost certainly would result in rampant inflation? Perhaps Washington should consult history and the past attempts to implement similar strategies in order to realize such policies end in serious problems. Consider what UK Prime Minister James Callaghan said in a conference in September 1976 regarding government spending to fight recessions – “We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candor, that that option no longer exists; and that insofar as it ever did exist, in only worked by injecting bigger doses of inflation into the economy followed by higher levels of unemployment as the next step. That is the history of the past twenty years.” Do these failed policies PM Callaghan mentioned sound familiar? We must all realize that such policies create the effect of funding government policies through hidden taxation (taxation without representation) that greatly limits economic growth and seriously affect each American’s standard of living.