Saturday, January 27, 2024



It is hard to believe there was a time in the United States, nay the world, where there as NO income tax! Indeed, for the first glorious 137 years of our Republic there was no income tax. Save for a brief period of fundraising for the Civil War, 3% for incomes over $800 from 1861 to 1872, there was no Federal Income tax. 
In 1913, however, the Democrat Party along with Progressive Republicans helped usher in the age of taxation with passage of The 16th Amendment which provided that "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

The initial 1913 shakedown was minimal; less than 1% of the population paid income taxes at the then 1% rate. Oh how things have changed. The passage of the 16th Amendment quickly led to nearly every State then implementing an income tax. Not to be outdone, many local municipalities jumped on the bandwagon and passed legislation implementing THEIR own taxes.

Over time the RATE of income taxation has gone up in percentage terms considerably, where for many high earners the net take-home pay is less than half the amount earned. For some 110 years the trend has been for the Governments (yes plural; Federal, State, Local) to take MORE.

This is obviously a serious concern for an investor, and especially a financial farmer because we know how much effort and labor it takes to create capital, grow it, and even harvest it. That entire process is now steeped in taxation. But it gets worse.

America has long been involved in many conflicts, obviously the Civil War, World War I and World War II immediately come to mind. There have been numerous other large scale conflicts such the Korean War, Vietnam War, Cold War, Iraq Wars, Afghanistan, and also day-to-day funding of parawars in Central America, South America, Africa, Ukraine, and Israel to name but a few. Wars are expensive, very expensive.

In nearly every single one of the example illustrated above, this country needed to raise funds. This was accomplished by either increasing (starting) taxation or printing more money. Productivity gains, winning wars, and general population growth developing Western States generally took care of the Civil War, World War I, and World War II. We saw taxation rates stabilize and fall. Inflation spiked, but then cooled. The straw that broke the proverbial camel's back, however, was Vietnam.

To pay for Vietnam a combination of increased taxation and more spending wasn't enough. Ultimately Nixon needed to take the United States off of the Gold Standard in 1971. This allowed the government to print virtually unlimited money to pay for the war and inflate our way out of the financial situation. At least for a time, because we never went back on the gold standard. And the results have been disastrous.
So what is a financial farmer to do regarding taxflation? The most important thing to do first is realize the danger taxflation poses to your economic well-being. It is in your best interest to make the best tax-advantaged moves you can make. A lot of that has to do with WHERE physically you generate income. Another concern is HOW MUCH income your generate, and it there are ways to reduce that number. Finally, if we are all using the fiat dollar, the one must put serious thought in how to squeeze immediate value from the currency.
Not everyone can move to Florida or Texas, control their income generation, and buy gold, real estate or stocks with whatever dollars they do generate. But for many of us, there are other salient options available such as reducing "friction," ie triggering gains unnecessarily, frequent moves, consuming rather than saving more resources than needed, or wasteful behavior. Those all have meaningful long-term impacts.
Ultimately, growth in real terms springs from increase in productivity. Stores of value, like gold and real estate, help protect against inflation because gold talks toil to obtain while real estate is a need universal good. But growth in a function of productivity...doing something in a new way; faster, cheaper, smarter than we are currently doing it. And that is what we are looking for as financial farmers.