Articles

Mar. 14, 2004

The Bush Tax Increase

On Bob Brinker's "Money Talk" radio show this weekend (an excellent show) Bob was trashing Kerry's proposal of rolling back the Bush tax cuts. His point, well taken, that by increasing taxes at the upper tax brackets less money is available for investment and thus the economy grows at a slower rate. I fully agree with Mr. Brinker but think those making this comparison are misguided and poorly informed.

Hidden Wealth Tax. In all fairness to Mr. Brinker he also expressed concerned for the Bush Administration's deficit spending. As is commonly assumed the Bush Administration cut taxes by lowering the upper bracket rates, temporarily raising limits on inheritance taxes and changing the ruling on dividends. In reality, a hidden wealth tax replaces these tax cuts. Let me explain.

Deficit Spending. As a direct result of deficit spending, the economy and the US dollar have declined. Reversing the Clinton Administration's balanced budget, debt under Bush has increased by $1.5 Trillion. Debt has increased at a rate more than double the entire Clinton Administration and eight times that of Clinton's last four years (the boom years).

Social Variables. Variables in an economy or any social environment are difficult to connect to an outcome. However, this is one case where the connection is clear. Floating currencies give the monetary system a more dynamic nature allowing for instant feedback. For example, when the Japanese were stealing markets and dominating the world economy with subsidized goods the Yen rose to unrealistic levels and exported asset inflation. The equalizing force was Japan's over expansion into depreciating assets while incurring a debt load beyond supportable levels.

The US Dollar. As measured by the Euro, since resuming Deficit Spending, the US Dollar has declined in value by 35%. While inflation has remained statistically low the CRB (Commodity Research Bureau) Index has increased by 45% - again offsetting currency depreciation

The only thing keeping inflation in check is the low cost of manufactured goods due to outsourcing and automation, resulting in a holding of the line on labor costs and wages. Both these changes amount to a de facto tax on those holding US Dollar denominated assets. While the National Debt is a transfer of taxes from the current generation to our children, current accounts also suffer. Like discounting bonds for future value as interest rates rise, current assets automatically depreciate to account for changes in currency valuations.

$3.85 Trillion in New Taxes. Current annual US GDP is around $11 Trillion. As such the 35% decline in the US Dollar represents an additional tax of $3.85 Trillion. Thus for $200 billion in tax cuts the US public is paying almost 20 times the price in new taxes as a result of currency depreciation.

Wealth Depreciation. While calculating US net asset value is open for debate the depreciation in value of a currency must extend beyond current sales to accumulated wealth. The value of all stocks, real estate, goods and other assets adjust accordingly. Few outside of corporate contract world hedge their assets against currency depreciation. Thus, those holding un-hedged assets see the value of these assets decrease. Accompanying the increase in value of the US stock market since the October 2002 bottom is an offsetting decline in the Dollar. Low interest rates reflect a low demand for Dollars making it difficult for the economy to attract foreign investment. Unreasonably, low interest rates hurt those on fixed incomes making fewer dollars available for consumption feeding back on a slower economy.

The Big Picture. When people talk about politicians raising taxes one has to discard rhetoric and look at the total picture. As seen in the depreciation of the Dollar, fiscally irresponsible governments tax their citizens at a far greater rate than the advantages gained from deficit-funded services. Wealth transfer, instead of giving a social benefit to the citizens of the country, actually goes to subsidize foreign governments. Compounding the insult, rising crude oil prices fund Islamic Fundamentalists through OPEC while the US military spends non-productive depreciating Dollars fighting Terrorism.