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Thomas Sowell
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Taxing the Poor

Comment

With all the talk about taxing the rich, we hear very little talk about taxing the poor. Yet the marginal tax rate on someone living in poverty can sometimes be higher than the marginal tax rate on millionaires.

While it is true that nearly half the households in the country pay no income tax at all, the apparently simple word "tax" has many complications that can be a challenge for even professional economists to untangle.

If you define a tax as only those things that the government chooses to call a tax, you get a radically different picture from what you get when you say, "If it looks like a tax, acts like a tax and takes away your resources like a tax, then it's a tax."

One of the biggest, and one of the oldest, taxes in this latter sense is inflation. Governments have stolen their people's resources this way, not just for centuries, but for thousands of years.

Hyperinflation can take virtually your entire life's savings, without the government having to bother raising the official tax rate at all. The Weimar Republic in Germany in the 1920s had thousands of printing presses turning out vast amounts of money, which the government could then spend to pay for whatever it wanted to pay for.

Of course, prices skyrocketed with vastly more money in circulation. Many people's life savings would not buy a loaf of bread. For all practical purposes, they had been robbed, big time.

A rising demagogue coined the phrase "starving billionaires," because even a billion Deutschmarks was not enough to feed your family. That demagogue was Adolf Hitler, and the public's loss of faith in their irresponsible government may well have contributed toward his Nazi movement's growth.

Most inflation does not reach that level, but the government can quietly steal a lot of your wealth with much lower rates of inflation. For example a $100 bill at the end of the 20th century would buy less than a $20 bill would buy in 1960.

If you put $1,000 in your piggy bank in 1960 and took it out to spend in 2000, you would discover that your money had, over time, lost 80 percent of its value.

Despite all the political rhetoric today about how nobody's taxes will be raised, except for "the rich," inflation transfers a percentage of everybody's wealth to a government that expands the money supply.

Moreover, inflation takes the same percentage from the poorest person in the country as it does from the richest.

That's not all. Income taxes only transfer money from your current income to the government, but it does not touch whatever money you may have saved over the years. With inflation, the government takes the same cut out of both.

It is bad enough when the poorest have to turn over the same share of their assets to the government as the richest do, but it is grotesque when the government puts a bigger bite on the poorest. This can happen because the rich can more easily convert their assets from money into things like real estate, gold or other assets whose value rises with inflation. But a welfare mother is unlikely to be able to buy real estate or gold. She can put a few dollars aside in a jar somewhere. But wherever she may hide it, inflation can steal value from it without having to lay a hand on it.

No wonder the Federal Reserve uses fancy words like "quantitative easing," instead of saying in plain English that they are essentially just printing more money.

The biggest and most deadly "tax" rate on the poor comes from a loss of various welfare state benefits— food stamps, housing subsidies and the like— if their income goes up.

Someone who is trying to climb out of poverty by working their way up can easily reach a point where a $10,000 increase in pay can cost them $15,000 in lost benefits that they no longer qualify for. That amounts to a marginal tax rate of 150 percent— far more than millionaires pay. Some government policies help some people at the expense of other people. But some policies can hurt welfare recipients, the taxpayers and others, all at the same time, even though in different ways.

Why? Because we are too easily impressed by lofty political rhetoric and too little interested in the reality behind the words.

Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His Web site is www.tsowell.com. To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate web page at www.creators.com.

COPYRIGHT 2012 CREATORS.COM



Comments

3 Comments | Post Comment
I have known about this concept by studing libertarian principles, but Mr. Sowell really puts this problem into context in an easy to understand way. All the spending the government does to try to help the poor, ends up only hurting them as well as everyone else. When government spends money it either spends real money that comes from taxes and therefore comes out of our pockets and the economy. Or it spends made up money which increases inflation and also hurts the poor and the economy. Its a lose/lose situation when the government overspends. The only winners are the special interst groups.
Comment: #1
Posted by: Chris McCoy
Tue Dec 11, 2012 11:27 AM
Fed reserve is a scam and an inside job, plain and simple.
Comment: #2
Posted by: Mr Bab
Wed Dec 12, 2012 4:16 PM
Just one thing: the Weimar hyperinflation happened in 1923, the same year Hitler was sentenced for High Treason. When he left prison in 1924, his party was outlawed, and he was a figure of obscurity and remained that until 1928, when his party - now legal again - got a whooping 2% of the vote. It took the Great Depression to let him rise to power, and that one had nothing to do with inflation at all - it was a deflation crisis, worsened by a stupid austerity policy that thrived to, wait for it, keep the inflation low. They succeeded in that, and Hitler gained the power. The hyperinflation had nothing to do with that, since there were 7 years between its end and the arrival of the impacts of the depression that brought nazism to power. People forget a lot in 7 years, especially if theirs a mild boom in between, as happened in Weimar.
Comment: #3
Posted by: Stefan Sasse
Thu Dec 13, 2012 12:34 PM
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