Follow the Loser
We are down in the land of the pampa, the gaucho, the tango, and disastrous fiscal policy.
But finally, in the race to self-destruction, the US has gotten ahead of Argentina.
There’s hardly any bad program or dumb policy that the Argentines haven’t already tried…at least once. So whenever Washington comes up with some new scheme, it’s almost always been tested out in Buenos Aires, where of course, it failed.
But last week, the US government moved into the lead. The Biden Administration proposed a ‘windfall profits tax’. The idea is that if something happens that allows businesses to make exceptional profits, the extra money should be taken away from them.
Profits are exceptional only when they provide exceptional benefits to the buyers. A man who sells water, for example, may find his profits rise in a drought. He may barely break even in normal years…counting on a drought — when people really need his product — to make any real money. Without the ‘windfall’ of a drought year, he may have to go out of business.
Likewise, an undertaker may regard every corpse as a profit centre; a war is a windfall to him. Should he be discouraged from stocking more caskets and training more embalmers?
Dumb and Dumber…er
We knew it was a stupid proposal. But now we have proof. This week, the Argentines proposed to do the same thing. The BA Times reports: ‘Argentina’s government to tax Ukraine war windfall profits, redistribute funds’:
‘Government announces a new bonus for low-income workers and the retired, saying it will fund payments with new taxes on “unexpected” economic gains resulting from Russia’s invasion of Ukraine.
‘Payments to the country’s poorest citizens would help them cope with rising inflation, Economy Minister Martín Guzmán said on Monday, declaring that the windfall tax would be turned into a bonus for those who need it most.
‘The minister said that unregistered workers and some self-employed would receive up to 18,000 pesos split into two payments and that retirees will receive 12,000 pesos in a one-off sum.
‘Companies with annual net taxable profits of more than one billion pesos (close to US$8.5 million) would contribute to the fund, a group which Guzmán said represents “a very small fraction of the country’s business network.”
‘The economic sectors which have benefited the most from the Ukraine war are producers and exporters of cereals and grain, such as wheat and maize.’
‘If you want more of something, subsidize it’, said Milton Friedman; ‘if you want less, tax it’.
Coddling the ‘homeless’, for example, we soon discover that more and more people lack places to live! And heavily taxing companies that provide most of the grains…when they’re most needed…will have an obvious effect. Come the next crisis; there’ll be less bread available.
But what about ‘inflation tax’? The feds deliberately spend money they don’t have on projects we don’t need and cover the gap with ‘printing press money’. The result? People pay the cost at higher prices rather than honest taxation.
And doesn’t this ‘inflation tax’ have the same consequence as other forms of taxation? Doesn’t it squeeze and punish whatever is being taxed? Doesn’t it reduce the quantity of water available in a drought year?
But what, exactly, does inflation tax actually tax?
The sneaky tax
Currently, the ‘tax rate’ in the US is about 8%. But if you’re renting a house in Miami, you may have to pay an additional inflation tax of 20–50%. The inflation tax on buying a used car may be as high as 39%, with the average vehicle selling for more than US$30,000. And when you go to fill up the tank, your ‘inflation tax’ rate on gasoline will be about 40%.
In Argentina, we see clearly what the ‘inflation tax’ hath wrought. Here, inflation is running at 50% a year. And it falls on the whole of the economy — on income, sales, profits, and savings. It reduces every paycheque; it cuts into every budget; it saps the entire GDP; and society’s wealth.
Inflation tax attacks the past as well as the future. People work their entire lives…storing up thousands of pesos…and then the value of it gets cut in half every year. And the investor shies away; he’s not going to build a new factory on financial ground that is so unsteady…so much like quicksand.
Houses are makeshift. Buildings are often in disrepair. The lights go out in Buenos Aires. You still see Ford Falcons on the roads…and Peugeots from the 1980s.
Brick masons earn US$25 a day (if they’re lucky), not US$25 an hour as they do in the US. People have fewer new houses and fewer cars; they drive on unpaved roads, and wait months to get into a public hospital…
…they even have to put off dying; caskets are in short supply.
For The Daily Reckoning Australia