The Right Opinion

Taxing the Poor

By Thomas Sowell · Dec. 12, 2012

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.

Someone who is trying to climb out of poverty by working their way up can easily reach a point where a $10,000 increase in pay can cost them $15,000 in lost benefits that they no longer qualify for. That amounts to a marginal tax rate of 150 percent – far more than millionaires pay. Some government policies help some people at the expense of other people. But some policies can hurt welfare recipients, the taxpayers and others, all at the same time, even though in different ways.

Why? Because we are too easily impressed by lofty political rhetoric and too little interested in the reality behind the words.

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11 Comments

Capt. Call in New Mexico said:

How true! Unfortunately, the left has blinded the minds of so many people, they will never understand this.

Wednesday, December 12, 2012 at 2:15 AM

G. Daylan in Peoria, IL said:

So simple-minded are men and so controlled by immediate necessities, that a prince who deceives always finds men who let themselves be deceived. - Niccoló Machiavelli

Wednesday, December 12, 2012 at 2:21 AM

Rip Van Winkle in Tulsa, Oklahoma said:

The worst tax rate of all is the regulation or action (think government or strike) that eliminates your job. That is a 100% tax. I worked my kids so hard when they were young that they could not wait to be old enough to work elsewhere. None of the eight are on the "dole".

Wednesday, December 12, 2012 at 10:52 AM

Wayne in Hinesville, GA replied:

Rip, It's too bad we don't have fathers like you today. Now we have missing fathers, mothers on welfare with no work ethic, kids who would rather steal, sell drugs, and do anything but honest work. Some on them wouldn't work if you offered them a job because the government has made welfare so attractive they see no reason to work. You are totally right about regulations forcing companies out of business along with the greedy unions. Congratulations on raising eight fine adults who have made it on their own.

Wednesday, December 12, 2012 at 12:00 PM

George Rogers Clark in Ohio replied:

I bet those kids of yours still tell their friends how hard you worked them with a great big, proud grin on their faces. My hat is off to you, Rip.

Wednesday, December 12, 2012 at 5:00 PM

Robert A. Hall in Des Plaines said:

A woman I dated briefly in 1973 when I was a state senator e-mailed me early last year, urging me to support Obama. I said, “What about the debt?” She replied that she “didn’t think of it as real money, because the government can always just print more money.” I then sent her this article about debt: “The West and the Tyranny of Public Debt.”
http://www.newsweek.com/2010/12/27/the-west-and-the-tyranny-of-public-debt.html
She responded that she “doesn’t do economics” because it makes her eyes glaze over! She is a retired educator with a college degree. I appreciate Dr. Sowell’s on-going effort to bail out the ocean of economic ignorance with a tea cup. I don’t see how the country survives intact. I will send her this article and link to it from my Old Jarhead blog. (www.tartanmarine.blogspot.com)

Robert A. Hall
USMC 1964-68
USMCR, 1977-83
Massachusetts Senate, 1973-83
Author: The Coming Collapse of the American Republic
All royalties go to help wounded veterans
For a free PDF of my 80-page book, write tartanmarine(at)gmail.com

Wednesday, December 12, 2012 at 11:56 AM

READY4ACHANGE in ILLINOIS replied:

And my sister thought you could just "get" money out of the ATM - until I explained to her one must PUT money in to get money out!

Wednesday, December 12, 2012 at 2:09 PM

Honest Abe in North Carolina replied:

Same education: children who believe milk comes from a grocery store!

Friday, December 14, 2012 at 2:49 PM

George Rogers Clark in Ohio said:

Mr. Sowell: this was a hard-hitting, factual report. We need more of this. Though most of the readers here are very well informed, getting a reminder of this magnitude is of great value. I am an old guy. I KNOW inflation is a monster problem. But I just do not remember to talk about it enough. This will help me remember. THANK YOU.

Wednesday, December 12, 2012 at 5:08 PM

Tod in Brooklyn, NY said:

Savings banks were also prevalent in American towns, years ago. One sign of a healthy economy is a large number of personal savings accounts. I don't know anyone,today, with one of those. The upper limit on what you could spend was the amount in your passbook. Uncle Sam now borrows 30 cents on each dollar, and gobbles up 30% of the NATION"S GDP. "Hang on Sloopy, Sloopy hang on!"

Wednesday, December 12, 2012 at 6:37 PM

Honest Abe in North Carolina said:

Why must we argue minor points of economics as regards the present administration? The goal of the elected depot is not taxation as an economic solution (merely a means to an end). It is the ultimate destruction of the nation, plain and simple.

Friday, December 14, 2012 at 2:54 PM