June 7, 2010

Many how-to books have been written on ways to minimize your tax bill, and a host of lawyers, advisors, and consultants earn a living by advising us on tax avoidance. Each type of tax influences us in our economic decisions. The income tax in particular is deliberately designed for that purpose, but the sales tax, too, can be tailored to affect your decisions.
Sales tax doesn’t apply to everything you buy. Prescription drugs are exempt. Years ago most foods were exempt. Services may be exempt. You will spend a bit more extravagantly on things that don’t incur that extra penalty of 5 or 6 or 7%. Because of this, the drug companies can hit you for a bit more of your cash than they would if their drugs were subject to sales tax. Yet nobody seems to realize that this is a taxpayers’ subsidy to the drug companies.
For every item that is exempt from sales tax, the state/county/city must simply tax other things a little bit more to make up their loot.
Even more of a subsidy is the income tax exemption for spending on prescription drugs. In this case the subsidy to Big Pharma can be 20, 30, or 40%, depending on your tax bracket. This applies too, to all medical expenses: a big subsidy to medical doctors, hospitals, and makers of medical equipment.
Does this puzzle you? It’s simple. Since the government gives you a tax exemption on such things, you are willing to pay more for them. The Medical fraternity happily charges us more for their goods and services while, to make up for the lost taxes on medical things, the government just taxes us more for other things.
So it goes with the income tax. It gives tax relief to some income (Capital gains) to encourage some of us (mostly the rich) to invest in capital and the growth of the economy, and charges the highest tax rates to the rich in order to be seen to punish them for the crime of being rich, and also to increase the incentive for the rich to invest in the capital market.
So the income tax is designed to control our economic decisions, as well as to provide the funds for the politicians and bureaucrats to spend.
At the beginning of the 20th century the word inflation was understood by all to mean an increase in the money supply. This made it all too obvious what caused inflation: The counterfeiting by the banks, under control of the Fed, by command of the politicians in power.
That might be embarrassing for government, but government can “fix” anything. They changed the meaning of the word “inflation” to what is now its universal usage. Now “inflation” is taken to mean the increase in general price levels, (which is really the gradual, delayed result of the increase in the money supply). So politicians can say, “Shame on those greedy speculators, merchants, manufacturers, and unions that are selfishly increasing prices and wages and profits, causing this awful inflation.”
Government spending of the counterfeit cash diverts the means of production to their own purposes, offering high wages and profits to induce people to transfer their efforts to production of what the government wants (Perhaps armaments, men, ships, planes, and uniforms for war).
I worked for many years in the design of military electronics, earning perhaps 10% more than I could in the design of commercial consumers’ goods. The downside of this was the need to frequently find a new job when the current government contract was completed.
As a result of government spending of the stealth tax, there are fewer goods available for the civilian population, while there are more dollars circulating to spend on what’s still available. Prices rise, so that civilians are less prosperous (perhaps even including the ones who moved up to higher pay to work in the munitions industry). The people have paid a very steep stealth tax to fund a war.
So there you have it. Government has contrived to appropriate a very large slice of our income, as painlessly as possible. Robin Hood has a generous salary, plenty of perks and a bit of graft on the side, a secure job which makes few demands on him, and early retirement with a very comfortable pension, all at your expense and mine. And war is always his excuse to increase taxes and expand the power of government.

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