Erod­ing Amer­i­cans’ sav­ings

The Washington Times Weekly - - Commentary -

The stealth wealth tax may be the sin­gle-largest tax ever im­posed on the Amer­i­can peo­ple, yet vir­tu­ally no one knows about it. What is par­tic­u­larly un­con­scionable about this tax is that it has been im­posed upon the most re­spon­si­ble cit­i­zens and the el­derly in a most dis­pro­por­tion­ate way, and the real tax rate on Amer­i­can savers has soared to record lev­els.

The Fed­eral Re­serve has held down in­ter­est rates so that the av­er­age per­son re­ceives less than 1 per­cent on mon­ey­mar­ket funds or cer­tifi­cates of de­posit — that is, money used for pre­cau­tion­ary and low-risk sav­ings. At the same time, the Fed has al­lowed in­fla­tion to rise to an an­nual rate of more than 3.5 per­cent. As can be seen in the ac­com­pa­ny­ing chart, when in­fla­tion rates are higher than in­ter­est rates, peo­ple suf­fer an ef­fec­tive real tax rate above 100 per­cent. At present rates of in­ter­est and in­fla­tion, this means that most Amer­i­cans pay ef­fec­tive tax rates on their sav­ings rang­ing from 360 per­cent for lower-in­come peo­ple to 390 per­cent for higher-in­come peo­ple.

In­fla­tion is a non-leg­is­lated wealth tax. If you had kept a $100 bill a year ago, to­day you would be able to buy just $96.20 worth of goods and ser­vices, given the cur­rent 3.8 per­cent in­fla­tion rate. The Fed, by its fail­ure to pre­serve the value of the currency as it is charged to do, has im­posed a stealth wealth tax on you.

The In­ter­nal Rev­enue Ser­vice (IRS) has made it worse by im­pos­ing a tax on nom­i­nal sav­ings in­come, not just on in­fla­tion-ad­justed in­come.

The 16th Amend­ment to the Con­sti­tu­tion gave the fed­eral govern­ment the right to im­pose a tax on “in­comes.”

A change in the price level caused by in­fla­tion is not in­come by any eco­nomic or sen­si­ble def­i­ni­tion of the word.

The IRS, in fact, rec­og­nizes that in­fla­tion is not in­come be­cause it ad­justs the in­di­vid­ual in­come tax brack­ets each year to off­set in­fla­tion. Yet it tries to im­pose a tax on the “imag­i­nary in­come” of those who re­ceive in­ter­est and cap­i­tal gains. It can­not have it both ways. The Con­sti­tu­tion does not grant the fed­eral govern­ment the right to im­pose an in­di­vid­ual wealth tax, which is what a tax on imag­i­nary in­come is, nor has Congress leg­is­lated such a tax.

We have a sit­u­a­tion in which tens of mil­lions of Amer­i­can re­tirees are re­ceiv­ing real neg­a­tive re­turns on their hard­earned sav­ings yet the fed­eral govern­ment, whose pri­mary job is to en­sure lib­erty and pro­tect per­son and prop­erty, is, in essence, steal­ing from them. I pon­der the ques­tion: Are the peo­ple at the IRS too dumb to un­der­stand what they are do­ing to their fel­low Amer­i­cans or do they just not care be­cause they lack an eth­i­cal com­pass?

It is clear that hundreds of bil­lions of dol­lars are be­ing ex­torted from Amer­i­can tax­pay­ers and savers with­out any leg­is­lated tax in­crease as re­quired by the Con­sti­tu­tion. So the ques­tion is: Who gains?

The an­swer is those in the po­lit­i­cal class who spend other peo­ple’s money on them­selves or on their fa­vorite con­trib­u­tors and sup­port­ers.

Be­cause the Fed is hold­ing in­ter­est rates ar­ti­fi­cially low (and this can last only tem­po­rar­ily) the govern­ment is pay­ing out less in­ter­est than free-mar­ket rates would al­low, thus en­abling the politi­cos to spend more be­cause the deficit looks smaller than it is. But this is only a short-term il­lu­sion.

The eco­nomic con­se­quences of this con game are grim.

As peo­ple in­creas­ingly re­al­ize that the Fed and IRS are steal­ing their wealth, they will find ways to pro­tect them­selves by do­ing such things as buy­ing gold and other non­pro­duc­tive in­vest­ments, choos­ing not to save or mov­ing money to other coun­tries. All of these re­duce the amount of money for pro­duc­tive cap­i­tal for­ma­tion in the United States — that is, the money that would have been in­vested in new plants, equip­ment, and re­search and de­vel­op­ment — the money that would have been used to cre­ate real jobs.

The Fed and IRS are en­gaged in this wealth de­struc­tion with the very ex­plicit sup­port of the Obama ad­min­is­tra­tion and many in Congress. These are the very same peo­ple who are claim­ing that their most im­por­tant goal is cre­at­ing more jobs, yet they are do­ing the op­po­site of what is needed to cre­ate them. Con­fis­cat­ing and tax­ing away the wealth that is needed to boost de­mand and to pro­vide cost-and time-sav­ing tools for work­ers is no way to cre­ate jobs.

To mit­i­gate the sit­u­a­tion, Congress should ex­plic­itly re­quire the Fed to keep in­fla­tion/de­fla­tion within 2 per­cent per year with the sanc­tion that the Fed gov­er­nors would be fired if they miss the tar­gets. (New Zealand did a sim­i­lar thing.) Congress also should ex­plic­itly pro­hibit the IRS from tax­ing imag­i­nary in­ter­est or cap­i­tal gains be­cause of in­fla­tion and al­low a tax­payer de­duc­tion for any real loss in prin­ci­pal of an in­vest­ment caused by in­fla­tion.

Too many mem­bers of Congress have been more in­ter­ested in pro­tect­ing the IRS and the Fed than in pro­tect­ing their own con­stituents. As vot­ers be­come in­creas­ingly aware of the stealth wealth tax, will their rep­re­sen­ta­tives be­come more re­spon­si­ble?

Richard W. Rahn is a se­nior fel­low at the Cato In­sti­tute and chair­man of the In­sti­tute for Global Eco­nomic Growth.

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