The Aussie tax return time approaches.
Let’s hope you get a refund. Here’s the thing…
There’s a tax you don’t even know you’re paying…and it’s a big one!
I’m talking about the inflation tax. The RBA’s inflation calculator tells us inflation was a cumulative 15.8% between 2020 and 2023. Or 5% per year on average.
No doubt you’ve noticed. And you probably think 15% is a laughable estimate. The cost of living has soared multiples that. Especially if you have a mortgage.
But how is inflation a tax?
Let me count the ways…
- The Fiscal Drag Queen and bracket creep are pickpocketing you
Inflation pushes your wages up into higher tax brackets. There’s a de-facto tax increase by indirect means.
Economists have invented all sorts of obscure terminology to describe this effect. The Americans call it ‘bracket creep’. They call it ‘fiscal drag’ in the UK.
The Australians can’t make up their mind between the two. And I reckon the Irish would call it ‘tax distillation’ because of what it does: it makes the same tax rates more potent.
How much more potent? The Australian Parliamentary Budget Office did the maths for the next decade.
They estimated bracket creep would amount to $276 billion in higher tax revenue, or 8.1 per cent of GDP!
If you’re paying attention to recent politics around helping families with the cost of living, you might want to know this too:
‘The impact of the Stage 3 tax cuts will be more than offset by bracket creep by 2031-32. In that year, the tax cuts are estimated to cost just over $30 billion, while bracket creep is projected to have added $57 billion in additional revenue.’
More and more of your income is getting taxed at higher and higher marginal rates. That shift is inflation.
But it’s not just your income that gets taxed by inflation…
- Taxing capital gains caused by inflation adds insult to injury
Capital gains tax is paid when your make a profit on the rising value of your investments. But what if that increase is because of inflation?
By devaluing money, the price of assets goes up. But their true value hasn’t changed. And yet, the increase is still captured by capital gains tax.
Sure, your stockmarket portfolio might’ve gone up 15% since 2020. But so did your groceries. And energy bill. And car insurance. And everything else. If you believe the government’s statistics…
The ‘real’ gain in that example was 0%. But you still need to pay your Capital Gains taxes on the 15% increase, as if your purchasing power was higher.
Thus, the government uses inflation to goose its capital gains tax revenue in a deeply unfair way. People are getting taxed for the falling value of their money!
- The oldest tax off the books
Economists have written about something called ‘seigniorage’ for centuries. It’s another inflation tax. But only indirectly.
Inflation doesn’t float all boats equally. It’s more like the ripples in a pond. It spreads, hitting each one of us at different times.
We understand that creating new money causes inflation. Governments usually get to spend the new money first. This means they spend it before prices have gone up.
You and I, however, spend our money after prices have gone up due to inflation.
This difference is known as seigniorage. And it’s precisely what happened during the pandemic.
Prices surged before wages did when the government handed out extraordinary amounts of pandemic spending. The government got value for money. We got higher prices. And our wages only rose long after prices did.
Don’t believe me?
That sums up three ways inflation taxes you. But notice just how insidious it is. How many Australians know inflation is a tax? How many know the government benefits from inflation?
Inflation is a pickpocket’s way of raising taxes. There is no announcement, law or political debate. You don’t know your money’s gone until you try to spend it at the shop. Instead of having less money, prices have gone up. Same difference, in the end.
But if inflation is a tax, that begs the question: what if the inflation we experienced was deliberate? What if it was an attempt to repay the debts we incurred during the pandemic? And what if this is just the beginning of a decade of decimation?
If you’re as worried as I am, click here. If not, you should be.
One last thing. If you don’t believe that inflation is a tax, consider these quotes from several famous economists (and one politician). They couldn’t agree on anything. Except that inflation is a deliberate tax levied by the government on you…
‘By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.’
John Maynard Keynes
‘There are only three ways to meet the unpaid bills of a nation. The first is taxation. The second is repudiation. The third is inflation.’
Herbert Hoover
‘It is a way to take people’s wealth from them without having to openly raise taxes. Inflation is the most universal tax of all.’
Thomas Sowell
‘Inflation is taxation without legislation’
Milton Friedman
‘I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments.’
Friedrich August von Hayek
‘Avoiding inflation is not an absolute imperative but rather is one of a number of conflicting goals that we must pursue and that we may often have to compromise.’
Paul Samuelson
If you want to know more about how the use of the inflation tax could impact you for next decade, and how to try and evade it, click here.
Until next time,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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