In today’s Issue:

  • We’re paying the inflation tax, big time
  • Did your wealth keep up with 3 years of inflation?
  • The oldest tax off the books

Politicians like to promise they won’t raise taxes. It makes me laugh. And then cry. Because I know what word games they are playing.

There are at least four ways to increase taxation without increasing taxes. And they all involve inflation.

What a coincidence that we’ve just experienced an enormous bout of such inflation! So soon after a pandemic’s worth of fiscal deficits at the Exchequer. Not to mention the energy crisis spending.

But how exactly does inflation amount to taxation? Let me count the ways…

The counterfeiters tax policy

Inflation pushes wages up into higher tax brackets. 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”. We call it “fiscal drag” in the UK. I reckon the Irish would call it “tax distillation” because it makes the same tax rates more potent.

Despite the attempt at obfuscation, the impact of bracket creep is getting a bit obvious. More and more of your income is getting taxed at higher and higher marginal rates.

You’ve seen the headlines. More and more pensioners are paying tax!

While a Treasury spokesperson is busy telling the BBC: “Pensioners do not pay any income tax if their sole income is from the full new state pension,” the rest of the country knows what’s really going on.

Actually, you probably don’t know how crazy things are. Consider this extraordinary article from The Telegraph about an Institute for Fiscal Studies:

Higher share of pensioners pay income tax than working people for first time, says IFS

A higher share of pensioners are paying income tax than working people for the first time amid a surge in worklessness and Tory stealth raids, analysis has found.

The Institute for Fiscal Studies (IFS) said 65pc of older Britons now pay tax on their income, up from just 48pc since 2010.

How did this absurd situation happen? It’s a symptom of the hidden scheme the Bank of England is using. We’ll reveal that on the 27th June.

For now, here’s what you need to know. Inflation is raising wages. At least, it makes them look higher. Adjusted for how much prices went up, people are falling behind.

But tax brackets aren’t adjusted to take this into account. It’s a pickpockets way of raising taxes. 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.

The Office of Budget Responsibility estimates the government will collect £19.7 billion more in taxes by 2028-29 thanks to this fiscal drag.

The Institute of Financial Services estimated in 2023 that, “A third of the expected record fall in household incomes this year is likely to be a result of this tax rise.”

And “14% of Britain’s adult population will pay 40%+ on at least part of their income in the 2027/28 tax year, in what will be the biggest increase in taxation since 1979.”

Not bad, for “not having raised taxes”!

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 the true value hasn’t changed. And yet, the increase is captured by capital gains tax.

Sure, your stockmarket portfolio might’ve gone up 20% since 2021. 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 taxes on the 20% increase, as if it had been a real gain. 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!

So, over the last three years, inflation in the UK was about 20%, cumulatively. Did the value of your belongings go up that much? If not, you actually fell behind.

And, once you add in capital gains taxes, you’d need to generate a return of about 24% just to break even.

First we’re crushed with a rising cost of living. And then, when our belongings rise in price as well, the government taxes us on it. Outrageous. But effective for paying down debt without “raising taxes”.

The oldest tax off the books

Economists have written about something called seigniorage for centuries. It’s another inflation tax. But only indirectly.We understand that creating new money causes inflation. But because new money is usually created by buying government bonds, governments 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. The 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 and energy crisis spending. The government got value for money. We got higher prices. And our wages only rose long after prices did.

That’s what this chart from the Office of National Statistics shows. The gap between prices and wages that emerged in mid 2021 was the pain of rising prices without rising wages. The purple line at the bottom measures that gap.

Source: Office of National Statistics

This seigniorage is the “revenue” governments get from being able to issue money. They can spend it before prices go up. And, while central banks may be independent, if they are buying government bonds, it still applies.

That’s just three ways in which governments benefit financially from inflation. Crucially, all of them are indirect, hidden and deniable. They didn’t require votes in parliament and no elected politician can do anything about them.

It’s also why central bankers were so adamant that inflation won’t happen, isn’t happening, won’t go high and will be temporary. It is a wealth tax in another form. And the idea that it was deliberate would cause uproar.

But what’s the fourth way? I’ll reveal that next week. It’s by far the most important one right now. And it risks triggering a financial panic, political chaos and more than a decade of terrible investment returns. Unless you know what’s coming.

But first…

Are you getting the message?

I hope the underlying ploy here is growing obvious. The inflation of the last three years was a deliberate attempt to increase taxes. All done without having to pass a law, elect a government or even utter the word “austerity”. And yet, more Brits are getting taxed at higher rates for more revenue.

Better yet, most of us don’t know who is responsible. And those who are responsible feign ignorance.

Unfortunately for them, members of The Fleet Street Letter’s Global Intelligence Network uncovered the playbook they are following. On the 27th June, we will reveal what’s really going on. And what you should do about it.

Bring popcorn.

Until next time,

Nick Hubble
Editor, Fortune & Freedom

P.S. If being stalked by inflation’s Fiscal Drag Queens and Bracket Creeps isn’t enough, tune in tomorrow. I’ll introduce you to the Fiscal Dominatrix.