Sunday, June 15, 2008

A Tax by Any Other Name

One of the most ludicrous debates of the never-ending election season is the one on tax policy. John McCain has changed his position on the Bush tax cuts and now says we should keep them. Congressional Democrats, who have argued for letting the tax cuts expire, quickly agreed to an economic stimulus package that includes mailing tax rebates to millions of American households. But it’s a sure bet that as November approaches, the “borrow and spend” Republicans will be saturating the airwaves with the “tax and spend” epithet hurled against the Democrats.

But what is lost in all in the election name-calling is that the government has two methods for taxing and it has been squeezing all of us financially while never using the word “tax.” The most familiar tax method is the one we all see with every paycheck; the method of subtraction. The government compels your employer to deduct money from your pay and send it to the U. S. Treasury. However, the government also controls the value of the currency you are paid in. Devaluing the currency is the second method of taxation.

As the U. S. government spends more and more dollars it doesn’t have, the world is being flooded with dollar-denominated IOU’s known as treasury bonds. These bonds are considered super-safe investments because the U. S. government has never defaulted on its debts. But why should it ever default? Unlike the rest of us, Uncle Sam has the power to print the dollars needed to pay its debts.

Federal debt is soaring into the trillions of dollars with no end in sight and no plan to pay it back. Foreign buyers of treasury bonds are losing confidence and the result is a steep slide in the value of the currency we are paid in. Eight years ago a Euro cost $0.82; today a Euro costs nearly twice that amount—over $1.50. The steep rise in the price of gas is only in part a change in the supply and demand equation for oil. The supply and demand equation for dollars is a significant part of the cost increase for gas, energy and food.

Politicians speak of their plans for “energy independence” or “food independence” as if the United States could wall itself off from the rest of the world and live only on its own resources. But independence is a myth. Oil is a global commodity and will always be sold on a worldwide market. Exxon-Mobil will always sell their product to highest bidder, wherever the bidder resides. The same is true for food companies.

If in the last election a politician had proposed a new substantial tax on gasoline to go towards federal debt he or she would have been voted out of office. But that has happened anyway without the word tax used as a label.

David T. King wrote in an op-ed article in the Wall Street Journal on May 23, 2008 that Oil is up because the dollar is down. A graphic that accompanied the article compared the price of oil in dollars with the price in Euros since 2002. In 2002 oil sold for $30 per barrel that at the time was equal to 30 Euros. Today oils sells for over $130 per barrel or just over 80 Euros. King concludes that we don’t need a gas tax holiday; we need an exchange rate policy.

In King's words: “Exchange rates can be managed.” But I don’t understand how exchange rates can be managed without the federal government first getting its own finances in order and wean itself away from reliance on debt.

Joseph Ganem is a physicist and author of The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

1 comment:

billm said...

Supply and Demand Sets Oil Prices – If You Believe That, I have a Bridge in Brooklyn I Want to Sell You!

Next time you have to buy diesel fuel, home heating oil or $4 plus gasoline. Ask yourself this question: Are crude oil, heating oil and gasoline necessities, or just ordinary speculative commodities? If they're the former, how can they be the latter? How can anyone buy into supply and demand setting oil prices when the markets are overwhelmed by everyone from small speculators, to institutional investors, to commodity index funds and large hedge funds and to Wall Street banks buying massive amounts of oil contracts? We also have the b.s. of “geo-political” concerns and government disseminated bogus “inventory” numbers. More on these factors at