Why Is Cash & Debt So Taxing???
In the United States, The Revenue Act of 1913 was the first time since 1872 that the federal income tax was restored. Taxes are a hotly debated topic, and the intent of this article is not to make a judgement if they are “good” or “bad”, but rather, to examine some of the historical facts pertaining to taxes. We will also examine the relationship between central banks, like the Federal Reserve of the United States, debt, and taxes!
Meet the Federal Reserve/Central Banks!
There is no coincidence that Federal Reserve of the United States and the Revenue Act were both implemented in 1913! The Federal Reserve (and all other central banks around the world) control our money supply via controlling interest rates and issuing loans. The Federal Reserve was originally established to help reduce the systemic risks inherent in the banking industry. Banks are known for loaning funds to their clients, and they always loan more funds than the reserves they have. Banks went bankrupt historically when they practiced aggressive lending practices, without having enough reserves held in the event that too many clients decided to withdraw their cash at the same time. In case you are not aware, when you deposit cash into your bank account, it is accounted as a ‘credit’ that the bank owes you. On your account, you see this as a ‘debit’ of course. In other words, they use your cash and lend, or invest it, to other clients. Central banks, like the Federal Reserve were created to spread this systemic risk across the globe, instead of localizing the risk to a single bank. In short, central banks control smaller banks and act as a self-governing body.
In today’s modern banking world, banks are known for having aggressive lending practices. Generally, banks only retain 10% of all cash deposits in the event that a client wants to withdraw cash. The emergence of online banking has allowed banks to have practices that are this aggressive, and certainly increases their systemic risk of becoming insolvent. Fortunately, most clients enjoy the convenience of online banking, which gives banks even more control over your cash, and they can charge fees for holding your cash, while they simultaneously lend most of your deposits to other clients and profit from the interest owing!
After the entire world was taken off the gold standard in 1971, banks had the freedom to print more cash because the dollar became debt! Allow me to elaborate – prior to 1971, the dollar was backed by gold. Gold has real value because it is produced in limited supply. After 1971, the dollar became debt – loans, such as bonds, mortgages, credit cards, lines of credit, and margin accounts, had to be issued for new cash to be created. This means that there is always more debt than there is cash. There is no limit on how much debt can be created, as the premise of debt is to grow exponentially over time, which means that there are also no limits on how much cash can be created. If the entire globe paid off all debts in existence, all cash would cease to exist
The Tax Connection
According to the famous author, G. Edward Griffin, taxes are used to help pay for a portion of the interest owing on government debts, which helps fund public services. In other words, taxes pay some of the interest – not the service itself! The services are funded by using debt!
There is a trend for taxes to increase exponentially, while our cash supply also increases exponentially. New politicians running for office usually use the same campaign promises – that they will lower taxes for the lower, and middle classes, and tax the rich at a higher rate. There is a large discrepancy between these promises, and the outcomes.
Taxes only applies to cash! Cash is controlled by local governments as they are decreed as legal tender. Think about it – if you hoard gold and you never sell it for cash, can it be taxed? The same logic applies to other assets like land or stocks. This is the identical strategy utilized by the famous author, Robert Kiyosaki – he uses cash flowing assets to buy what he terms “real money”, which is gold and silver. Once he buys gold and silver, he never sells it! He wants his precious metals ‘savings account’ to appreciate over time. Gold and silver are perfect for this purpose! If you save cash, not only has it been taxed, but it also depreciates as a result of inflation (what some call “a hidden tax”).
Taxes only apply to a currency that is controlled by a government. Taxes are designed to make society ‘more fair’ by evenly distributing wealth to help pay for government services, like healthcare or education. Unfortunately, these services were first funded with government debt. Central banks have a license to print cash. The more cash they print, the less it is worth, which is the direct cause, and definition of inflation. After inflation, most citizens are taxed on their earnings, which further decreases their purchasing power! Do you have a plan to hedge inflation? One of the many reasons to buy gold is to hedge inflation!
By Shawn Sklar, Broker and Contributor at Worldwide Precious Metals