Exposing the invisible tax

This is a short follow up on the post entitled “A better measure of CPI inflation” which I put out the other day. 

I stated that measuring inflation by looking at StatsSA/SARB’s statistics on the consumer price index (CPI) is flawed and that perhaps the lowest bracket on the personal income tax scale is a better way to gauge by how much and fast people’s cost of maintaining a certain standard of living has increased.

The floor of the lowest personal income tax bracket is up from R40,000 in 2002/03 to R122,000 in 2008/09. This is a 205% increase over the period, or a compounded increase of 20% per year.

While this is by no means ground breaking if you understand the Austrian school of economics, if you’re not familiar, get a load of this: The Rand Gold price is up from roughly R3,000 in 2002/03 to R9,000 in 2008/09, nearly exactly the same amount that the floor of the lowest income tax bracket is up over the same period, 200% or three-fold. See the chart below from Reuters.

Clearly there is more to the metal than some would like to admit, namely that it is real money. The paper money that we use on a day-to-day basis is money substitute, it is no different in character to Monopoly money, except that it is legal tender. Gold measures the extent of paper money inflation much more honestly than your friendly government official. You see, the price level in the economy will remain stable, when measured (or priced) in gold, especially during inflationary periods (read: fiscal deficits and money printing) as we’ve lived through over the past decade. To understand this, you need to make gold the centre of your monetary universe – everything else revolves around it.

This is what linking this chart to the sharp jump in the lowest personal income tax bracket shows us – if somebody earned one Krugerrand (one ounce fine gold) in 2002 and still earned one Krugerrand in 2008, he/she would be to a large extent sheltered against the paper money inflation, and be able to afford more or less the same luxuries as back then. But if somebody earned R3,000 in 2002 and had only been given CPI-adjusted salary increases each year, he would in 2008 be earning less than R7,000/month. 

That, friends, is the invisible tax which the government and central bank imposes on us, giving us no choice in the matter.  You pay the tax without even knowing it, in this case over R2,000/month is taken out your pocket over five years. That is how the insidious process of inflation works.

The same goes for saving money, exchanging your cash for gold during inflationary times maintains purchasing power. It always has, and always will - whether you like it or not.