I am a big proponent for lower taxes for a variety of reasons, but one of the main reasons I don’t like them is because taxes are inflationary. All of the current political candidates answer to our current problems is to raise taxes. The economy is going south, we have massive deficits and we have a large under funded social security program — and the proposed solution that we keep on getting from our current candidates is that they want to take out even more money out of our hands through taxes.
If this does not sound ludicrous to you, think of this analogy. If a parent gave his teenage child 100$ to last him for a week but came back with a credit card bill for 1,000$ one week later, would you be inclined to give that child more or less money? Pretty obvious answer isn’t it? So how is it any different from what we face with our government today?
If the government were run as a business: people would get fired, costs would get reduced, debts would get paid and fiscal sanity would become the norm but not so with these current candidates.Through higher taxes- the cost of producing things goes up. These year-to-year increase in taxes come in the form of excise duties and sales taxes, both of which add to the price of goods. On top of the federal taxes, states and cities also charge taxes. The main ones cities charge are property taxes which have been getting out of control even though real estate prices have been falling. In addition we are hit with hidden taxes everywhere we go for example we pay taxes on the following: airline travel, car rentals, housing, hotels, parking, water, etc, the list is endless.
These taxes feed inflation through government spending which than adds to deficit spending. Taxes are always passed on to the end user, so as we are taxed we also are getting higher inflation. So taxes are like double whammy: the individual is now paying more money out of pocket and on top of that the money that the taxpayer has left in his pocket buys less things.
The best advice I can give is to always vote with your wallet-it tends to keep the politicians more honest. They can’t get spend or steal what they don’t have. If you don’t believe me look at this latest stat: “The full tax burden of the American citizen including state, local, and sales tax as a percent of income, hit an all-time high of 32.69% in 2007.”
Published at March 11, 2008
in Money.
There was a brilliant article last Friday in the FT by Gillian Tett that bears worth reading. “The Vicious Spiral That Haunts the Debt Markets” “The western financial system is caught in a trap … on the one hand, there is an urgent need for clearing prices to be established for impaired assets to restore confidence; on the other hand, if this is done in a mark-to-market world, there is a risk that some banks will run out of capital. Policymakers are in the unenviable position of knowing almost any step they take risks denting sentiment further”.
“The risk now is that we will remain trapped in this climate of grinding fear for months – at best. Few institutions have much incentive to voluntarily create clearing prices. However, hedge funds are now being forced to make asset sales in an ad hoc, opaque manner that is adding to the sense of fear. This is forcing the banks to mark books lower and pull in their horns, sparking even more hedge fund sales and fuelling concern about banks. It is a viciously unpleasant spiral”.
In plain language this is what is happening. The banks lent too much money to the hedge funds. In some cases on a 30 to1 ratio. For every 1 dollar the hedge fund had in capital the hedge fund was able to purchase 30$ worth of goods. In a rising market this, amplified the funds returns. But now, in a declining market the hedge funds are going under along with the banks’ money they borrowed.
As the value of the assets in the hedge funds have been going down, the banks have been making margin calls. The hedge funds have been forced to sell those assets into the market. And as these funds have continued to liquidate its holdings, the hedge funds have been driving the value of its own assets down- thus incurring more margin calls. In turn this is forcing wide spread liquidations. This is why there does not appear to be an end in sight.
There is now talk of watering down capitalization regulations so as to minimize the massive liquidations. Gillian Tett concludes with this ominous note:
“We are now up to $188bln in terms of total write downs globally from the estimated credit losses. These mounting losses in turn make it more difficult for economic agents to secure funding. That then leads to more economic weakness, which then fuels the wave of delinquencies, defaults and foreclosures.”