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The Public Policy
Taxing the Poor
Inflation is the meanest tax — and it even affects welfare benefits in cruel ways.
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.
About the Author
Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website 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.
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OP4| 12.11.12 @ 7:37AM
And Congress has never, ever indexed our tax brackets (or the AMT) to inflation. They love it when the lower and middle class are inflated into higher brackets without any real increase in income.
Al Brooks, bleedingheartlib | 12.11.12 @ 11:04AM
"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."
Of course!
Sowell is a bit senescent to write something so obvious.
John Navratil| 12.11.12 @ 5:10PM
Perhaps he was merely responding to a nonnescient electorate.
Von Mises Jr| 12.11.12 @ 7:57AM
Inflation not only crushes the poor in a slow grind, it also destroys many middle class people with bubbles and busts.
The housing bubble was an inflationary phenomenon where government forced banks to put people in houses they could not afford pushing vast amounts of money into the housing market. At first, it seems like a win-win. Your equity in a home was like an ATM machine. You even get to pay back in cheaper dollars for those with any economic insight. But then deflation left many upside down and bankrupt.
This is now happening in student loans. College tuitions have risen about five times the normal rate of inflation. So when a kid gets out of college with huge loans and the job market collapses, Ben "The Bank" Bernanke has succeeded in destroying kids lives along with their parents.
But if the dollar or markets don't collapse beforehand, the biggest bubble is the government bubble. And it will eventually destroy the 80% not in government work when the promises to the 20% become unsustainable.
Student loan debt totals about $1 trillion and government pensions are touted at about $2.5 trillion in the red. Buckle up.
JimH| 12.11.12 @ 8:00AM
Everyone keeps talking about the top brackets. Did not the Bush cuts also remove many low income people from paying income tax? Not that I think it a bad thing. I believe all should have some skin in the game; but will they now be rejoining the tax rolls.
Cobalt| 12.11.12 @ 8:27AM
"Inflation is the one form of taxation that can be imposed without legislation."
-Milton Friedman
Mike G| 12.11.12 @ 8:29AM
Why are we talking about inflation? There's no inflation in this country. Ignore the fact that food and gas prices are rising every week. That has nothing to do with inflation. Inflation is only determined by the things you DON'T need buy every week (i.e., refrigerators, automobiles, etc.).
c. j. acworth| 12.11.12 @ 8:40AM
Inflation is the reason I'm buying freeze-dried food and ammunition, not because I think I'm going to hold off the Obamazombie Apocalypse here in my little fortress of solitude in New Hampshire. Look at it this way.
Right now I can buy freeze-dried food for 2-3 bucks a serving. The stuff lasts for 25 years in it's original container, probably longer than I have to live. In a couple of years I retire. 10 years from now how much will that single serving cost at the grocery store? $6? $10? More? When Helicopter Ben Bernanke gets through, a greenback will be a fancy piece of T-paper. At least I'll be able to eat one meal a day on the cheap, whatever the other two cost. Same thing with the ammo. Sure I might have to defend myself sometime, but lets get real. A lone individual will be overrun pretty quick, however well armed he is. You gotta sleep sometime. But how much will a brick of .22's cost 10-15 years from now? Assuming of course Obama hasn't succeeded in banning private gun ownership, in which case they'll be priceless.
JP| 12.11.12 @ 8:47AM
There are inflation calculators online. I occaisonally use them out of curiousity. I calculated what $1000 in 2000 would be worth today, and I came up with $771.00. That is, since 2000, the value of the dollar lost 23%.
JP| 12.11.12 @ 8:48AM
If you had $100 in 1911 today it would be worth $4.
Petronius| 12.11.12 @ 9:51AM
The tax policies of liberals are about one thing: depriving ordinary people of disposable income because they Don't like what WE do with it.
RichTex| 12.11.12 @ 11:32AM
While Dr. Sowell’s article is on inflation, it does point out that about half of the county (the “47%”) pay no income taxes. While they do pay FICA taxes, those taxes are believed by most to be “investments” or “insurance premiums” to be returned to the taxpayer upon retirement or disability. So we have a substantial proportion of the population which has no personal interest in assuring that the federal government maintains some degree of financial responsibility.
Years ago, there was a southern comedian named Brother Dave Gardner. (He died in 1983.) In one of his comedy acts, he proposed taxing the poor on the grounds that it would give them the incentive to rise above poverty and would give also give them a personal stake in resolving the government’s financial mess. He had a point: It’s about time we revamp our tax system so that everyone has some skin in the game. This can be done through a flat tax or a consumption tax; I don’t have a personal preference for either.
Now don’t scream at me, you liberals/socialists/Marxists (and isn't that a redundancy!), “But the poor don’t have any money!” We currently spend more in welfare per person below the poverty line than the median income of working Americans. Citizenship entails responsibility. So does the privilege of living in this country for those who are not citizens. Everyone, even the “poor”, should exercise it.
JD| 12.11.12 @ 12:22PM
Over 20% of Americans pay no net taxes even with FICA included, because their non-FICA has gone so far negative.
JD| 12.11.12 @ 12:24PM
As Ross Kaminsky pointed out recently, we spend about $1 trillion annually on welfare programs in this country. That's $20,000 apiece for 50 million people. There are less than 50 million people below the poverty line.
If that money were being distributed efficiently (which it isn't, since government is in charge), then it should be impossible for anyone to have less than $30,000/year. $40,000, if you consider what opportunities to work exist.
Grzmlyk| 12.11.12 @ 2:28PM
But then the poor would disappear.
Can't have that! You have to keep them poor and angry at the 1 percent. That's the whole Democrat game. Sure, they're all for importing a new underclass in the form of illegal aliens - er, I mean "undocumented Americans" - but if you solved poverty, what in the world would Democrats do?
Ditto racism. Racism is the elixer of life for the liberal class. It is the sweet nectar of instant resentment on the one hand and paralyzing guilt on the other. Racism is the best thing that happened to the Democrat party since, well, since poverty.
And don't forget that the real objective of poverty programs isn't the poor at all; it's the burgeoning bureaucracy. For every dollar the taxpayer spends to help the poor, the poor receive maybe 30 cents. The rest goes to those millions of faceless millionaire pencil pushers, lawyers, lobbyists, congressmen, staffers and Democrat party apparatchiks. The more "poor" there are, the more of these parasites pop up like weeds in the garden.
The most insidious thing about inflation, beyond what Sowell lays out, is that the people never recognize whose hand is in their pocket; when gas prices rise, they blame Big Oil; when retail prices rise, they blame Big Retail; when food prices rise, they blame Big Grocery.
And then they look beatifically upon the government, the nihilistic agent of their destruction, as their white knight savior. Ironic, no? No. Tragic.
John Navratil| 12.11.12 @ 4:33PM
Grzmlyk,
And all our children would be above average ;)
Actually, we could all make above $1 million per, today, and still there would be poor. In this country, poverty is defined as not having access to good or services available to the average person. If everyone had a jet and I had to putz around in a King Air, I would be poor! So, gimme' my damn jet you capitalist bastard!
JD| 12.11.12 @ 4:53PM
The poor HAVE disappeared, if you define poor by African standards.
And they have disappeared if you define poor as "having less to spend each year than the federal poverty limit".
The key is that the Left does not define poverty in terms of what a person has to spend, but rather, defines it in terms of what a person produces. This is terribly ironic, given their insistence that spending, not production, drives economies.
The Left could redistribute a million dollars per year to an unemployed person, but he would still be defined as poor so long as they measure poverty in terms of pre-tax income, which is how they measure it.
Measuring well-being in terms of pre-tax income is patently absurd in a society that increasingly divorces pre-tax income from what he has to spend, unless of course one's purpose is to justify further divorcing!
JD| 12.11.12 @ 12:26PM
Inflation actually doesn't hurt a lot of the poor IF Democrats, through unions, welfare, and wage laws, can keep their incomes up with inflation.
This is because they have no savings to depreciate, and many in fact have DEBTS whose balance is also reduced by inflation.
People with negative net worth and incomes tied to inflation LIKE inflation.
wolf| 12.11.12 @ 1:25PM
inflation..according to the MSM dosent really exist...its hardly ever mentioned in all the financial coverage..debt ceiling/fiscal cliff...and just general financial coverage..
does it matter/do most people realize its impact?
well I sure do..six years ago or so..my local bank was paying over 5% interest on CD accounts. today you would be lucky to find 1% on amounts under 10k / 2-3 year term notes..
if your paying bank fees..they will eat up that pale interest payment..so basically your paying the bank to "hide" your money..
Jessica@PaydayLoans@ | 12.25.12 @ 7:37AM
Well, I am sure there should be justice. If a person is wealthy and his/her income allows to pay taxes then they should be hire. It’s not right when the secretary living through loans pays higher tax than a wealthy person. People with low and middle income should pay an affordable tax, it depends on their income. I think that Obama and Congress finally should fix this problem and define what taxes people should pay. It’s also important to create normal tax conditions for every one, it should not be such a mess.