While the private sector around the world is struggling to stay afloat, the public sector is not that much better off either. Fortunately for the public sector, they have the ability to take wealth from the general population via various venues and it can do it at its own discretion. Private enterprises simply go belly up.

How the government taxes you

Any action that the government takes to transfer wealth to itself from civilians is taxation. When you sales tax on your new computer, the government takes money from you. The government also takes a cut from each pay cheque that you worked so hard for. When the government needs more money, it can simply raise taxes.
Of course, raising taxes won’t make you very popular, especially if you’re trying to win the next election. Governments can print money. Printing money gives the government a bigger cut of the pie, thereby eating your purchasing power. The effect is the same as raising taxes, but it creates a lot less negative publicity for politicians.

IMF – an international coalition to tax

What is interesting about this crisis is that even the IMF, an international organization, is also taking part in taking our money.
The IMF is a lender of last resort for countries that are going through a crisis. They successfully led South Korea to recovery from the Asian financial crisis for example. Given the scale of the current crisis, even the lender of last resort is feeling the pressure of not have enough money to lend out. The IMF needs to unwind its gold reserve.

The problem? IMF is one of the largest holders of gold in the world. Its holdings are large enough that they can put serious pressure on the price of gold when they sell. This places IMF in a tough position. To overcome this problem, the IMF and other important holders of gold, including the U.S., have agreed to limit the amount of gold that they can sell. I suspect that this is an important factor contributing to gold’s surpassing the $1,000 mark. Yes, governments and NGO’s are fixing the market for gold and are “taxing” us through higher gold prices.

Who is paying the “gold tax” to the IMF?

IMF will gain from its disposition of gold at the expense of the following group of people’s wallets. The first group is gold speculators. I cannot predict how much higher gold can go, but the coalition to keep gold price high cannot last forever. No nation is willing to surrender its monetary sovereignty to IMF for a very long time. When that day comes, the gold market will be competitive again. Like any bubble, the last person caught with the hot potato will be burnt.

Businesses that use gold as a raw material will suffer. Gold is an important raw material in the production of electronics. Electronic products are luxury items that people substitute away from in tough economic times. With costs rising and falling demand, business is going to be tough.

Similarly, jewellery stores face the same problems as electronics manufacturers. India’s jewellery sales are down by half this year and their Chinese counterparts are also feeling the same pinch. I can only hope that this gold tax will be used effectively to stimulate the economy for long term growth and not spent on useless infrastructure projects.

The Tobin tax

There have been suggestions to bring back the Tobin tax. The Tobin tax was introduced, but never implemented, when the US dollar was taken off the gold standard in the 70’s. The Tobin tax is a tax on transactions of currencies. The intended benefit is to make currency transactions more expensive and steer away speculators that cause market volatilities. However, making foreign currencies more expensive would also hamper international trade and cross border investments. In other words, it would hamper global economic growth.

Luckily, the Tobin tax is extremely difficult to implement because it would require the cooperation of many country. Still, it does reveal that the mentality of policy makers is to take money from the civilian (giving them a smaller share of the pie) and making the pie smaller (but hindering economic growth). For investors, this means that there are a lot more dollars out there chasing after fewer good investments. Be prepared to change your investment strategies more often.