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Three ways governments extract your teeth: taxes, inflation, currency depreciation

We are all aware of taxes, an honest, transparent, democratic impost. Taxes, if properly used, can actually increase our wealth by providing essential public goods.

But there are two sneaky ways in which governments extract our wealth. When taxes are less than expenditure (deficit financing), we may think we are not paying for the government expenditure. But we are. In many ways (apart from the fact that future generations now get implicated).

There is NO FREE LUNCH.

We pay immediately through (a) inflation and (b) currency depreciation, as the economy's prospects are reduced (government expenditure is LARGELY a waste. Markets discount it steeply). 

BOTH these methods are REGRESSIVE, meaning they hurt the poorest the most.

Whenever deficit financing is imposed for a long duration (as with India), expect the poorest to get poorer. 

The good thing is that forex (and financial) markets PUNISH bad policy. We can readily "score" a government's policy by examining the performance of its currency.

The following data foreign exchange rate data over the past ten years shows that Australia and China have OUTPERFORMED India, Europe and USA. The  wealth gain in China and Australia has been in effect AT THE EXPENSE of India, Europe and USA. Markets are usually not a zero-sum game. This particular issue (forex), however, IS a zero-sum game.

INDIAN RUPEE HAS LOST VALUE AGAINST CHINESE YUAN [Source] (click for larger image)

INDIAN RUPEE HAS STEEPLY LOST VALUE AGAINST AUSTRALIAN DOLLAR

AUSTRALIAN DOLLAR HAS STRENGTHENED SIGNIFICANTLY AGAINST US DOLLAR

US DOLLAR HAS OUTPERFORMED THE EURO (DESPITE BOTH COMPETING TO GET TO THE BOTTOM) 

AUSTRALIAN DOLLAR HAS OUTPERFORMED THE CHINESE YUAN

Without trying to read too much into these comparisons, the following order of "merit" in terms of good policy can be postulated (don't hold me to account for this hypothesis!).

1st prize: Australia

2nd prize: China

3rd prize: USA

4th prize: India

5th prize: Europe

Sanjeev Sabhlok

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20 thoughts on “Three ways governments extract your teeth: taxes, inflation, currency depreciation
  1. nikhil

    taxation is theft if not given voluntary.all govt taxation laws are nothing but diff ways to steal wealth.

     
  2. Sanjeev Sabhlok

    Nikhil

    I agree. The fact that it is our representatives (i.e. our agents) who vote on our behalf on taxes implies taxes are voluntary. We give them because we WANT to give.

    s

     
  3. Kiran

    Hi Sanjeev,

    Is the loss in value of the rupee solely linked to deficit financing?

    I can think of a few possible reasons for the loss of value, which are

    a) High dependence on Oil imports. As the price of oil rises, more dollars are being bought by the Indian oil importers which leads to higher cost of oil.

    b) Reducing exports or exporters keeping their income in dollars and not converting to rupee.

    c) Bad policies, including lack of reforms which include allowing FDI in India. This leads to loss of intrinsic value of business which in turn leads to investors (primarily FIIs) pulling their funds out of the market.

    All this leads to an imbalance which is unable to stem the depreciation of the rupee.

    Also, there was deficit financing even when the value of rupee appreciated about 2 years back which started to make our exports uncompetitive.

    I may be wrong in my comments, so looking forward to your reply.

    – Kiran

     
  4. nikhil

    no we pay them taxes because we don’t want to be thrown into cage (jail) for not agreeing with their opinion ( Law).

     
  5. Sanjeev Sabhlok

    Kiran, you are right. The example I gave simplified many issues. Note, though, that your causes (b) and (c) are related to bad government policy. To that extent they fit the overall concept – of government motivated loss of value. The example (a) is an actual supply related issue, and to that extent outside the control of government. Not all loss of value of the rupee is created by government but a very substantial part is.

     
  6. Sanjeev Sabhlok

    Nikhil

    Of course you’ll be thrown into jail if you don’t pay taxes. That’s the VOLUNTARY, democratic agreement on funding of public goods. You are REPRESENTED even in that decision. You can directly contest and become an MP or send a representative. It is generally seen that people VOLUNTARILY decide to throw those who don’t pay taxes into jail.

    If you want to reward those who don’t pay taxes with a Nobel Prize or a $1 million reward, you’ll have to first get elected then make the relevant law.

    s

     
  7. nikhil

    sanjeev
    this is where state brainwashing comes into play.apart from your opinion what evidence do you have that constitution applies to me? is constitution a contract?

     
  8. Kiran

    Yes Sanjeev. Majority of the loss of value is due to the government.

    But my doubt was with regards to deficit financing. I have been reading a lot about Keynesian school of economics. I have not read much of the other schools. I am unable to grab a handle on which school is best suited because each of them seems to have pros and cons.

    I have observed that you are staunchly against Keynesian and i assume you favour the Austrian school. So could you point me to certain sources (books), where i could get an understanding of the world view.

     
  9. Sanjeev Sabhlok

    In some nations the constitution is enacted after a referendum (e.g. Australia). That’s a clear contract. In others like India, through a representative constituent assembly. That too, is a contract.

    I recommend renewing the constitution every 30 years. But even if it is not renewed, it is a valid legal contract, that binds YOU as citizen to the laws YOU enact through your representatives.

    You may, if you wish, directly become a representative, as members of FTI aim to become.

     
  10. Sanjeev Sabhlok

    I’m not an “Austrian” but an economist. That means I don’t bind myself to any one school, but pick what I think makes sense. Even Austrians don’t all agree on the same thing, anyway.

    I’d recommend Hayek’s work above all, and Friedman’s. And Julian Simon’s.

    s

     
  11. nikhil

    sanjeev
    for a valid legal contract four elements needed to be present. one of them is signature.show me my signature on constitution. where is meeting of minds? that’s two element missing.”It is well-established that before a binding contract is formed, the parties must mutually consent to all material terms. A distinct intent common to both parties must exist without doubt or difference, and until all understand alike there can be no assent. [Citation omitted]. If one party thinks he is buying one thing and the other party thinks he is selling another thing, no meeting of the minds occurs, and no contract is formed. [Citation omitted] (con¬tracts are founded on the agreements, not on the disagreements, of the parties.

     
  12. Sanjeev Sabhlok

    Nikhil, Your (father/grand-father’s) representatives have signed India’s constitution.

    You can leave India if you don’t agree with the constitution.

    s

     
  13. nikhil

    sanjeev
    if that is the case then i am not party to the contract my grandfather was.even if your father build a house he cannot legally bind you to live in thar house check with any lawyer you want.as far as leaving india is concerned.Just because you drive a Dodge doesn’t mean I have to
    .
    In other words, just because you may feel the need to be dominated by another person such as a “governor,” doesn’t mean I want or need to also. If you need a “king” that’s your “prerogative.” However, your choice to shop at Sears doesn’t obligate me to “contribute” a “fair share” of their operating expenses and if I don’t, it doesn’t mean I have to leave the geographic area I choose to live in i.e., “Sears: love it or leave it.”
    sanjeev answer this honestly.i have seen judges/lawyers/govt officials heart sink when i called out their bluff when they bring out a case union of india vs nikhil kapoor.i politely ask show me the complaining party i want to cross examine him/her.

     
  14. Sanjeev Sabhlok

    Nikhil

    You are free to challenge India’s constitution and offer your own to the people of India. If India doesn’t agree, you are free to leave India and go to a jungle where you and your family can set up your own kingdom.

    I trust you realise you are living in a delusional world of unreality by rejecting a DEMOCRATICALLY created constitution.

    Anyway, I realise you won’t change your mind, so why not you leave India and go to another nation where people agree for you to NOT pay taxes. Only a jungle would accept such an approach. You definitely won’t get electricity or roads or the internet. These all are based on significant public goods provision and costs which you clearly don’t want to pay. Fine. You are free to found your own TAX-FREE “nation”.

    Best of luck!

    s

     
  15. Sanjeev Sabhlok

    The great American war (Boston tea party) was based on the concept of no taxation without representation. There hasn’t yet been a Boston tea party that demands “No taxation. Period”.

    Why don’t you organise your own rebellion in India to not pay taxes that have been determined through such representation. I’d like to know how many people join this absurd demand to free ride.

    You use roads, defence, police, justice, and don’t want to pay. Sorry. Such theft of public property is unlikely to find you many supporters.

    s

     
  16. Sunil

    Sanjeev, is it your argument that only government can provide electricity or roads or the internet (or schools)? If govt can restrict itself to protecting my property rights and liberty (as proposed by Milton Friedman) they can get the required revenue thru sale of public assets or minimal taxation (tariffs or consumption tax). Government has no moral right for taxation especially income taxes is direct theft.

     
  17. Sanjeev Sabhlok

    Sunil, you must read BFN. Can’t repeat my entire writings each time a new commentator comes to this blog. Sorry. Trust you understand.

     

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