I started my day like any other, by going to my poultry selection of internet news providers. I prefer the Drudgereport the best, but there doesn't appear to be a good equivalent for Australia unless someone happens knows one? Anyway, I go to news.com.au on 1 July (the beginning of the new financial year) and to my surprise I find out that we've all received a tax cut. I should be happy, I should be joyous... but I'm not. You know why? One word: inflation.
Here's a summary of the changes they made:
1) The 30 per cent income threshold is increased from $34,000 to $35,000
2) The 40 per cent tax rate is reduced to 38 per cent
3) "... An individual on $40,000 a year will get an extra $2.88 a week, while someone on $100,000 a year will get an extra $10.58 a week."
Wow... amazing. Big deal, they moved the tax bracket around a little, by a whopping $1000. Lest we forget the 2% decrease in the 40% tax rate, what a bold gesture. My favorite part is point (3)... an extra $2.88/week if you earn $40K, $10.58/week if you earn $100K. Let's take a closer look at the numbers:
1) $2.88/week = $149.76 at the end of the next financial year. If you earn $40K, this represents a 0.3744% increase in your income in a year.
2) $10.58/week = $550.16 at the end of the next financial year. If you earn $100K, this represents a 0.55016% increase in your income in a year.
The depressing amazing part of this is that the rate of inflation in Australia, according to the RBA (which cooks the books), is 2.5%. Now we just know the real number is sooo much higher than that, but for the sake of argument let's roll with this number. Let's go back to the numbers:
1) $40K income... 2.5% inflation = $1000, this means you lost $1000 of purchasing power in one year. The new tax cut gave you $149.76.
2) $100K income... 2.5% inflation = $2500, this means you lost $2500 of purchasing power in one year. The new tax cut gave you $550.16.
The 'phenomena' of inflation is that it is like the wind... you can't see, but you feel it's effects. Even though nominally you still have $40K, in reality, you've lost money at the end of the day. So the tax cut the Federal government gave you was really an 'inflation subsidy' gesture.
But let's take it a step further. An Australian banker once told me that the % interest on your savings account in the bank will always be below the rate of inflation, one assumes the 'actual' rate of inflation after you calculate it correctly (for an example go to www.shadowstats.com). So the rough average is about 4.45% according to http://www.ratedetective.com.au/savings-accounts, which means that the actual rate of inflation maybe somewhere near 5%. This means:
1) $40K income... 5% inflation = $2000, this means you lost $2000 of purchasing power in one year. The new tax cut gave you $149.76.
2) $100K income... 5% inflation = $5000, this means you lost $5000 of purchasing power in one year. The new tax cut gave you $550.16.
So how's that tax cut looking now?
Australia, you got served.
God bless,
Dr Washo
Also, the thing about inflation (the CPI measure the RBA uses) is that it only measures price increases for a select “basket” of goods - which, of course, staff at the RBA select. The problem with only considering “selective price inflation” as they do is that it completely ignores the purchasing power people should be gaining from productivity increases.
As technology and production techniques improve, it gets cheaper and easier to produce things. The result is lower prices for consumers—that $1 you have can now buy more of the same good than it could before.
The constant debasement of the dollar through monetary expansion is, as you said, invisible to the naked eye. People don’t realise they’re being robbed. The whole joke of “stable prices” (stable being defined as a 2-3% increase per year) is that the productivity gains that would usually go to the consumers instead end up in the government coffers. And that’s without even considering the destabilising effect inflation, even at low levels, has on the economy!