But there is another tax, relatively unknown but extremely insidious, that targets only the financially responsible. Before we get into the specifics of that tax, however, I should define exactly what I mean by financially responsibility, since the tax affects each category differently. In my opinion, there are three types of people when it comes to finances:
The first type of people are what I will call the "financially irresponsible". These are the people that spend more than they make, have a chronic lack of cash in the bank, and rack up a large amount of unsecured debt.
The second type of people are what I will call "financially on-the-fence". These are the people that spend exactly as much as they earn. No more, no less. When the first unexpected bill arrives (e.g. car repair, medical deductible, etc.), they will often fall, if only temporarily, into the first category,.
The third type of people, as you might have guessed, are the "financially responsible". They not only refrain from going into debt, but also consistently put money away into a "rainy day" fund, either for emergency situations or retirement.
The financially responsible are the bedrock of banking industry, being the least likely to default on any loans they do take on (e.g. mortgages), so it may surprise you to learn that this mysterious tax not only targets the financially responsible, but actually works to the advantage of the financially irresponsible! What is this tax, you ask?
I'll call it the "Fed Tax".
As you may have surmised, I'm talking about the Federal Reserve. Most people don't really have a grasp of how the Federal Reserve works, so before I can explain the tax to you in detail, we'll start with a primer on central banking.
As (I hope) most people know, the bank itself does not keep on-hand 100% of the money it takes from you in deposits. Banks make money by taking the money you deposit, and loaning it out to people and businesses that need it and can afford, in the bank's estimation, to pay it back with interest. Obviously, they can't loan all of it out at once, or there would be nothing to give you when you come into the bank to make a withdrawal. Banks, therefore, keep a small percentage of total funds on hand to accommodate these day-to-day transactions. This is known as fractional-reserve banking, and the minimum reserve percentage a bank must keep on hand (typically 10%) is mandated by the Federal Reserve, for banks in the US.
Sometimes, however, after making a loan, a bank finds that it does not have this minimum reserve amount on-hand. In this case, the bank with too little reserves may take out a loan from another bank that does have reserves in excess of the minimum. The weighted average of the interest rates on all of these loans across the banking industry is known as the federal funds rate. Like any economic scenario, this rate is subject to supply and demand. If a bank has a large reserve on-hand, the price of borrowing money from them (the interest rate) goes down. Likewise, if a bank has very little reserve cash on hand, the price of borrowing that money from the bank goes up. So we can see that if all banks in the system have little cash on hand, the federal funds rate (being the average of all transactions) will be high.
In a situation where there is little to no money to borrow in the banking system as a whole, and the interest rates for such loans are high, what is a bank under the reserve minimum to do? This is where the Federal Reserve comes in. The Federal Reserve may lend money to a bank to increase its liquidity. This allows the Federal Reserve to manipulate the federal funds rate, since the liquidity of the system as a whole is the major factor in the interest rate at which banks loan to one another.
Where does the Federal Reserve get the money to loan? The answer, as you may have guessed, is "Nowhere". Some might say that the Federal Reserve simply "prints" the money, but this is not literally the case in the modern banking system. In simple terms, the Federal Reserve just adds some zeros to the accounts of the banks in question. Whether by printing money or adding zeros, however, the result is the same: inflation.
Inflation, of course, is the devaluing of a currency, a decrease in the purchasing power of the money in your pocket. What would buy a certain amount of a good yesterday now buys less of that good today. The new, lower value of your money is inversely proportional to the amount of new money "printed". Simplistically, if the Federal Reserve were to double the total amount of money in the system, the money in your pocket would then be worth half of what it was before.
"But wait!" I hear you say, "Isn't that the same as if the Federal Reserve had simply taken half my money directly out of my bank account?" The answer, of course, is yes. And notice both where that money goes, and who it impacts the most.
As to where it goes: In essence, the Federal Reserve takes the money from you and gives it to the banks. The banks then use their newfound liquidity to loan that money back to you, with demands for interest. Also note that your decreased purchasing power makes it more likely that you will require such loans from the banks.
Also note the group it impacts most: The people with the most money in the bank. The "financially responsible" group is hit hardest, since they have the most money to devalue. The "financially on-the-fence" are not impacted at all, since they have no money to devalue. The "financially irresponsible", on the other hand actually gain when this happens, since their debts are worth less due to the reduced value of the dollar!
And now you know of the Fed Tax.
"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." - John Maynard Keynes
(Note also that the artificial manipulation of interest rates by the Federal Reserve can cause other economic problems, since low interest rates represent "cheap money" to people looking to make long term investments. Since the increased liquidity of the banks is not due to people having built up excess savings, but instead is due to people having been divested of their savings by subterfuge, this temporary "bubble" in economic development meets reality when there is no consumer on the other end with cash to spend on the results. Oops.)