- Following the clues to discover who stole your money
- Why is tax revenue booming while real wages plunge?
- Inflation is the murder weapon
You’ve been robbed. Pickpocketed by someone in Westminster… or was it the City of London? In this episode, like in a whodunnit murder mystery, we’ll endeavour to find out…
Our first clue is this quote from John Maynard Keynes’ book The Economic Consequences of the Peace: “By [inflation] the government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft.”
Luckily, it has been detected indeed. When you went to the shops, you discovered that your money was only worth a fraction of its previous purchasing power. But that doesn’t quite solve who did the crime, nor how…
Our second clue comes from the rather long list of other victims who share your loss. They can be found across the UK, but also beyond… on the other side of the world, even!
Last month, for weeks on end, the top story on Australia’s top news aggregation website was people complaining about their tax return. It all got a bit silly, with various influencers, TV hosts and journalists lining up to outdo each other over who had to pay the most to the Australian Tax Office (ATO) at the end of the Australian financial year.
What they all had in common was the utter shock at having to pay at all. They were all used to getting refunds from the ATO each year, after over-paying taxes during the year and then declaring deductions at the end of it. They’d gotten used to an annual bonus that they could splurge on. But this year, they had to top up their tax bill, instead. Cue the outrage that went viral, with more and more people complaining that their usual tax refund had become a tax payment.
At one point, the news media decided to trot out an accountant, of some sort, to explain to people that they had to pay more because they’d earned more. Their total earnings had gone up, hence the higher taxes. So paying more taxes at the end of the financial year really wasn’t something to lament, but to celebrate. It’s a sign that they made more money.
People certainly didn’t appreciate the helpful advice. After all, their wages had gone up a fraction of what prices had. So they were paying more tax while earning less income once adjusted for inflation – a double whammy.
And that’s the third clue – real wages. If your wages go up 5%, but inflation is 10%, then your real wage growth is -5%.
And real wages have dropped badly, all around the world. In the UK, 2022 was the worst year since 1977, leaving real wages below 2008 levels. In Japan, real wages are down 15 months in a row while the US managed 23 straight months of real wage declines. For Aussies, 2022 was the biggest decline in real wages on record.
Imagine paying more taxes while your real income gets trashed… quite the combination.
This is an especially intriguing clue to what happened because economic theory dictates that inflation is supposed to be caused by wage growth. In fact, the Australian central bank was so confident that only wage growth could fuel inflation that it promised not to raise interest rates until wages had taken off after the pandemic, which it expected to happen… next year.
Instead, wages have remained sticky, as economists put it, while prices surged. Thus, our real wages crumpled.
Anyone who did get raises to keep up with inflation is only kidding themselves. By paying higher marginal tax rates, you only get to keep an ever-smaller share of your income. Combine inflation of about 20% with a marginal tax rate of 40% and you’d have to increase your income by a third over the past two years just to have the same standard of living.
That certainly puts some of the recent pay disputes into perspective, doesn’t it…? Indeed, the large pay disputes that have broken out across the UK and globally are clue number four. Governments are not willing to raise people’s wages in line with inflation, let alone a raise… let alone a raise once you consider marginal tax rates.
Our fifth clue comes from the government’s budget. This week, we got confirmation from HMRC and other tax collectors around the world that tax revenues are up… a lot. Taxes paid in the UK are up 40% on 2019 levels. In the US, it’s 30%.
So, your wages aren’t keeping up with inflation, but you are paying far more taxes, even on an inflation-adjusted basis.
It’s not just income that’s affected in this way. How much of your capital gain is just inflation? Don’t bother telling HMRC – it doesn’t care. It wants the taxes paid on all gains, regardless of inflation.
What sort of incentive does that create, I wonder…
So, we know where the money has gone. But, how was the crime committed?
The method is clear. Inflation has pushed people into higher tax brackets – that’s the combination which made the crime possible.
In March of 2021, then Chancellor of the Exchequer, a fellow known as Rishi Sunak, froze tax thresholds, meaning they wouldn’t rise with inflation. At the time, inflation was running at 0.71%. It promptly doubled the next month. And doubled again five months later. And doubled again two months after that. Before peaking over 10%…
He couldn’t have timed the freezing of tax thresholds better!
But who managed to pull off this inflationary taxation heist? It was a team effort. First, the Chancellor froze tax thresholds, then the Bank of England engineered double-digit inflation.
This devalued your money and pushed you into higher tax brackets if you did manage to get a raise. Together, it means more taxes and less wealth.
Of course, the impacts of inflation are far more insidious than just missing out on your money without being able to realise how, why or who to blame. John Maynard Keynes explained many other impacts, too:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. 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.
It was a good way to run the budget then, wasn’t it?
At times like this, with the central bank and government working against you, your investments must perform ever greater feats just to avoid falling behind inflation and taxation. The question is: how? And if you’ve ever considered trading more actively, or learning how to, you might find the answer here.
Until next time,
Editor, Fortune & Freedom