The new stealth tax
With inflation already at 4.4%, twice the Monetary Policy Committee's target of 2%, there is a new, subtle form of tax – inflation.
About now, those of us yet to complete a self-assessment tax return start to worry about the 30 September deadline, after which HM Revenue & Customs refuses to do the sums for us. But with Consumer Price Index (CPI) inflation already at 4.4%, twice the Monetary Policy Committee's (MPC) target of 2%, you should worry about a more subtle form of tax inflation.
Developed economies historically do well when inflation is positive but fairly low, which is why the MPC has a 2% target for inflation. But once inflation gets out of control, there are few winners. For reckless borrowers it's a boon because, provided they can afford interest payments, inflation gradually erodes the value of debt, which is fixed at the point a loan is taken out.
Consider a £100,000 mortgage taken out when your salary is £25,000. If RPI rises for the next three years at 5%, and your wages keep pace, the same £100,000 debt changes from being four times your income to just 3.46 times (since your salary is now £25,000 x 1.05 x 1.05 x 1.05 = £28,940). The mortgage may still be the same £100,000 in "absolute" terms, but the "real" amount has shrunk.
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But high inflation is generally bad news for everyone else. It's a problem for savers, as noted above. Pensioners, and anyone else on a fixed income also lose out because their purchasing power is constantly eroded. And as a wage earner, your salary needs to keep pace with 5% inflation or you lose out too, taking a pay cut in real terms.
This problem is compounded by Gordon Brown's 'stealth taxes' which rarely move in line with inflation. For just one example, the 3% stamp duty threshold on property has stayed at £250,000 despite average house price rises of roughly 180% over the past 10 years. The result? The Treasury's stamp-duty revenues rose to £6.5bn last year, compared to just £2.7bn in the 2001/02 tax year.
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