Inflation is a cruel tax on low-income families
Inflation is akin to a regressive tax. This is because individuals with lower incomes allocate a larger proportion of their earnings towards essential expenses such as fuel, food, and housing.
By Vaughn Cordle, CFA / September 19, 2023
Inflation is the phenomenon where the overall prices of goods and services in an economy experience a sustained increase. This results in a reduction in the purchasing power of a country’s currency and also affects the value of certain assets. Essentially, when inflation occurs, the same amount of money buys fewer goods and services, and covers fewer expenses, leading to a decrease in the standard of living. In economic terms, inflation is often likened to a “hidden tax” because it effectively erodes the wealth of individuals by raising costs and pushing them into higher tax brackets, while simultaneously boosting the government’s capacity to spend.
Inflation primarily arises as a result of substantial government expenditure and the monetary policies implemented by the Federal Reserve. The unsustainable deficit spending and the resultant accumulation of debt necessitate future repayment through mechanisms such as increased taxation and reductions in social expenditure. This situation has significant implications, including diminished economic growth and a lower standard of living for the majority of the population in the future. Furthermore, it exacerbates poverty levels among those who are already economically disadvantaged.
Recent economic data indicates that real wages, which account for inflation, have shown a slight year-over-year increase in the most recent monthly report. However, it’s important to emphasize that what truly matters in assessing economic well-being over time is the level of inflation. Over the past 25 consecutive months, there has been a consistent decline in real wage growth, signifying that wages have not been keeping pace with rising prices.
During President Biden’s tenure in office, it has been observed that real wages have fallen by 14.4% in comparison to the average of the major components of inflation over the preceding three years. To illustrate this point, consider the example of gasoline prices, which have surged by a significant 73.3% over the same three-year period. In contrast, wages have only seen a modest increase of 14.7% during this time frame. To put it differently, the rate of inflation for gasoline has outpaced the growth in wages by 58.6%.
This economic trend underscores the importance of monitoring not just nominal wage increases but also real wage growth, which accounts for the impact of inflation. When real wages consistently lag behind inflation, as demonstrated in this analysis, it can result in a tangible reduction in the standard of living for individuals and families.
Inflation is a cruel tax, particularly affecting retirees, individuals with lower incomes, and those who do not possess assets such as property or stocks. This demographic is particularly vulnerable to the adverse effects of rising prices. During President Biden’s tenure in office, many low-income earners have found themselves in a more precarious financial situation than before.
Inflation is also akin to a regressive tax. This is because individuals with lower incomes allocate a larger proportion of their earnings towards essential expenses such as fuel, food, and housing, including rent. Consequently, when prices in these essential categories rise due to inflation, the economic well-being of low-income families is disproportionately affected.
One unintended consequence of government policies, encompassing both fiscal and monetary measures, has been the significant widening of the wealth gap between those who have substantial resources and those who do not. This disparity has become more pronounced during the Biden administration’s time in office.
The levels of public debt and deficit spending have reached unsustainable levels, raising concerns about the potential for heightened social conflict when taxes inevitably need to be increased or social spending is reduced. Notably, the average national debt per taxpayer currently almost $255,000, a figure that does not encompass additional financial obligations such as replenishing the strategic petroleum reserve or addressing college loan debt.
The administration’s policies, which include opposing the use of fossil fuels and the resulting increase in energy costs, coupled with rising interest rates, could potentially push the economy toward a recession later this year or next.
Regrettably, inflation is just one of several negative consequences stemming from the economic policies associated with the Biden administration. A broader calculation suggests that the combination of open borders, an expanding welfare state, and massive deficit spending may lead to financial instability, increased crime rates, and a diminished standard of living for the majority of Americans.
This economic and social trajectory will likely have the most severe impact on retirees, the middle class, and low-income earners, as they are more vulnerable to the repercussions of these policies, which are perceived as detrimental to their economic well-being.