It is curious, with all the moral outrage expressed against excessive public taxation, that little attention is ever focused on the immorality of interest charges, a form of private taxation. At least some of the public tax revenues are used to provide real goods and services that each taxpayer benefits from using. Things like roads, schools, hospitals, utilities, fire departments and law enforcement agencies benefit us all. But the interest charges that we all must pay to rent the nation’s money supply are only a net benefit to a tiny percentage of the total population. In fact, even most of our public taxation revenues are used simply to make interest payments on our accumulating public debt or to pay for the interest costs which are imbedded in the price of the goods and services that the government purchases on our behalf.
In a book entitled “Interest and Inflation Free Money”, Margrit Kennedy, a professor at the University of Hanover in Germany, discusses a fascinating investigation that she conducted to determine what portion of the final cost of certain government provided goods and services was due to an accumulation of interest charges. She found that even for relatively labour-intensive operations such as garbage collection, that cumulative interest costs imbedded in the price chain of inputs accounted for about 12% of the total cost of the services provided. For services in which costs were more equally distributed between labour and capital inputs, such as water and sewage treatment systems, accumulating, imbedded interest charges accounted for about 47% of the final cost to the public. For capital intensive projects such as public housing, however, the total interest expense accumulating in the input price chain accounted for about 77% of the total cost of providing the service. It is remarkable, then, that it is rarely ever acknowledged in the mainstream media that high interest costs are one of the leading causes of inflation.
It is even more remarkable that our government claims it is necessary to RAISE interest rates to control prices. Such a policy demonstrates just how deeply our monetary policy serves the interests of the money lenders. Low interest rates are a sign of a weak economy. When the economy is weak the demand for new loans dries up and interest rates HAVE to be lowered or else people will start defaulting on their existing loans. Since the money lending game is so highly leveraged, bad loans can ripple through the economy very quickly and destabilize the whole monetary system. Once the economy starts to recover, however, the money lenders are very eager to catch up on the interest they had to forgo during the downturn. Rising consumer demand is a signal to both sellers and lenders that the catch-up period has begun. Both attempt to increase their profits by inserting a fatter straw into our pockets. By raising interest rates "to slow down inflation", the government is really trying to sponge up consumer spending power before it triggers a real economic boom. Expansion of our production capacity is very expensive and risky. It is much safer to just take people's money away from them by increasing profit margins and interest rates. Bankers prefer an economy that is stable, predictable and firmly under their control.
While many Canadians enjoy receiving interest income from their savings and investments, very few ever even come close to recovering what they pay out in interest costs either on money that they borrow personally or on interest charges that are imbedded in the cost of the goods and services that they purchase. Few Canadians realize that, even if they don’t owe a penny personally to anyone, they still pay thousands of dollars per year in interest costs which are passed along to them in their tax bills and in the selling price of the goods and services that they purchase. It is this private tax called interest that the public needs to focus on.
Interest is the most regressive tax there is. Those who are least able to pay (ie. those who have low incomes, few collateral assets or have been labeled a bad credit risk) must pay a higher rate than those who are much better off. When the rich borrow money they often do so at a rate which is at or below the prime interest rate. When the poor apply for credit they are often forced to borrow from loan sharks and finance companies which charge rates that are four or five times higher than the prime interest rate.
Another common complaint of the well-to-do, who are leading the crusade against public taxation, is that taxing corporate profits and then dividend income and capital gains constitutes double taxation. But compound interest is simply a form of perpetual double taxation. A “smart” investor structures his portfolio so that he earns new interest income on his accumulating interest income throughout the term of his investment. Why then should he complain if the source of his income is taxed only twice?
Also, as interest costs are passed along the input chain from supplier to supplier, they are continually compounding. At least with public taxes like the GST and PST, the cost of the taxes (to the intermediate channel members) are stripped out of the price of the goods and services produced until the point of final sale. In the case of interest costs, however, each supplier’s interest cost must be paid for in full by the next supplier in the chain who must also incur additional interest costs to finance his inventory and run his own operations. At each step along the production, distribution and retail chain additional interest costs are added to the final selling price of the product or service. The significance of compound interest costs dwarfs the unfairness of double taxation, yet a hardly a word of concern is ever spoken.