Tags: Repression | Tax | Toll | Investor Portfolios

Repression Tax Takes Its Toll on Investor Portfolios

Repression Tax Takes Its Toll on Investor Portfolios

By    |   Sunday, 27 March 2016 08:58 PM

Democrats and Republicans have been stealthy raising taxes on investors and savers for years.

The evidence of this is all around us but well hidden behind a screen of interrelated government policies that operate in the background. 

Like a puzzle, it is hard to discern the whole picture from just looking at one or two pieces.  But the puzzle maker knows exactly what the puzzle looks like.

This same thought applies to people’s bewilderment at the economy.

It’s nearly impossible to get loans from banks yet they will push credit cards all day long at 18% or more.  Savings accounts pay nothing.  Even government debt is paying interest at a rate that is lower than taxes and inflation.

By buying bonds the typical investor is losing money.

A small rate of inflation, a low interest rate, and direct taxation working together virtually rob every investor of any wealth building return on their capital.

The benefit goes to the government in facilitating its ability to increase its annual and supplemental spending by borrowing to make up for the increasing gap between tax receipts and total spending.

Even after experiencing the near financial meltdown in 2007 over excessive debt, the government has increased the total debt to staggering heights.  Consumer debt is also at astonishingly high levels.

The government (that is Congress, the Administration, the Federal Reserve, and Wall Street) hope that economic growth will enable these astounding levels of debt to be paid off.

That is just not happening.

The supposed increase in GDP and low rate of inflation are just a theoretical number manipulated by economists to create the appearance that things are not as bad as everyone viscerally knows that they are. 

There is no real economic growth and the actual real inflation rate is likely 4x the rate officially reported by the government.

If economic growth will not pay down the debt and avoid default and the consequential collapse, then how is the government doing it?

The answer is the financial repression of investors and savers.

Financial repression is the back door method of paying down government debt by surreptitiously taxing private savings and investments indirectly.

The International Monetary Fund issued a Report last year on “The Liquidation of Government Debt” which stated clearly that financial repression is the policy being used in the United States and other countries—both advanced and emerging—to avoid politically unpopular actions that would be necessary to keep the debt levels from causing an economic collapse.

As the Report stated, “There is considerable cross-country variation in the extent of financial repression and the magnitude of the financial repression tax.”

“When the controlled nominal interest rates coupled with inflation produce negative real interest rates, it liquidates (reduces) the stock of outstanding debt; we refer to this as the liquidation effect.”

“However, even in years when real interest rate are positive, to the extent these are kept lower that they otherwise would be via interest rate ceilings, large scale official intervention, or other regulations and policies, there is a saving in interest expense to the government. The savings are sometimes referred to as the financial repression tax.”

Essentially, the financial repression tax is a mechanism to transfer wealth from savers and investors to government on an extraordinary scale but without ever saying they are doing it. To make sure it works, government uses a series of interlocking law and regulations which traps savers and investors making them effectively, as they say, penned in sheep to be shorn.

What is the United States government doing to impose the financial repression tax?

The Federal Reserve and Treasury have imposed explicit or indirect caps on interest at zero or near zero rates.  Even if you accepted the government’s numbers, the official interest rate is lower than the official inflation rate.  This alone proves that capital is being mispriced and misallocated.

Inflation is required because the government intends to pay off its debt obligations by reducing the value of US dollars.  The Federal Reserve says it wants higher inflation because it wants to save the economy from deflation. But deflation can be good for consumers when their money becomes more valuable and they can buy more for the same dollars.

Financial institutions—banks, credit unions, insurance companies-- are being incentivized by government to buy a lot of government debt and penalized when they don’t.  The regulators require higher capital reserves which can only be met by having certain approved assets. Government debt which is issued at capped rates. Officially this is being done to maintain the integrity and safety of the financial industry and its shareholders.

The effect is that revenues of the financial institutions are depressed which could cause their share value going down or the value of insurance policies being depressed.

To offset this, the potential loss is passed through to depositors and policyholders which results on savers and investors financing the government at government dictated rates of return. Losing market rates of interest for investors and savers is nothing more than a tax.

To make sure nobody escapes, the US government has imposed a world-wide curb on US investors and savers who want to escape this system. Financial repression works best when everybody is held captive and financially controlled.

To do this congress passed the imposition of the Foreign Account Tax Compliance Act, as part of the HIRE Act. It picked up on earlier efforts to curtail Americans from the freedom to invest world-wide under the Qualified Intermediary Rules.  FATCA was billed as a tax compliance measure which was projected to raise only miniscule amounts of tax.

The dominate purpose of FATCA is to force foreign institutions to stop doing business with US people.  It forces capital being held offshore back into the United States and subject to the financial repression regime.

More subtle measures are also used.  The Federal Reserve just has to send a letter asking for cooperation on dealing with bank loan policies.  Banks get the hint and dutifully fall into line. Capital controls do not always have to be explicit.

The United States economy is in deep trouble.

Cutting spending programs or raising taxes would create a political firestorm for politicians who like being re-elected by special interest voting groups who like living off the government’s largesse. 

Maintaining a regime of financial repression enables the redistribution of enormous amounts of wealth from investors and savers to the government.

The public may not know exactly what is going on since financial repression operates in the background.  But they know that something is taking a heavy toll on their portfolios and savings.

Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher. To read more of his articles, CLICK HERE NOW.

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Democrats and Republicans have been stealthy raising taxes on investors and savers for years.
Repression, Tax, Toll, Investor Portfolios
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2016-58-27
Sunday, 27 March 2016 08:58 PM
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