The other kind of inflation

June 30, 2011
Andorra la Vella, Andorra

In addition to being one of the most picturesque places on the planet, Andorra is a textbook example of what happens to an economy when a limited government sets up a liberal tax regime.

Photo taken this morning in Ordino, Andorra outside the private bank I was visiting

Like conjuring money out of thin air, taxation is just another form of inflation that either directly or indirectly sticks the end-user consumer with a higher price.

Think about it– when businesses get taxed on their payrolls and profits, it’s consumers who end up paying for it at the cash register. When governments decide to pass sales taxes or increase VAT rates, it’s consumers who end up paying more.

This is theft, plain and simple… a robbery from everyday, hardworking people perpetrated by unproductive bureaucrats. Governments around the world collect trillions of dollars each year by sticking consumers with higher prices, only to go waste it all trying to centrally plan their economies.

In his recent book Daemon, author Daniel Suarez summed this up when he wrote, “Anyone who has ever tried to share pizza with roommates knows that [central planning] cannot ever work. If Lenin and Marx had just shared an apartment, perhaps a hundred million lives might have been spared…”

The major fallacy in politicians’ logic is that if governments can collect enough tax revenue, they will be able to dump it all back into the economy, creating jobs and stimulating growth.

It sounds great in theory, but in practice, government spending is prone to massive misallocations and value distortions… let alone corruption and bribery. This is how we end up with bridges to nowhere, empty cities, expensive wars, and millions of dollars of stimulus money spent on giant signs bragging about how much stimulus money has been spent.

Spain is a great example of how this doesn’t work. For years, the government has been collecting painfully high taxes on earnings, savings, consumption, and death, then plowing this stolen booty back into the economy, effectively becoming the country’s dominant economic force.

Years of misallocations have created dismal economic conditions, as well as a horrible debt crisis.

At this point, the government has nearly run out of cash, the official unemployment rate is north of 20%, and retail prices on the street are rising by the month. So how has the government dealt with such overwhelming economic adversity? By raising taxes, of course… calling the exact same play, even though it never works.

After raising the VAT last year to 18%, personal income rates have been raised to nearly 50% on Spain’s top earners. Even middle-income earners are being taxed now at 37% to 43%.  Capital gains rates have also been hiked. Guess what’s going to happen to prices?

You’d think that Spanish politicians would look at their track record and realize that government spending does not buy a one-way ticket on the economic gravy train… especially when low-tax Andorra is just up the road.

Andorra has no direct taxation on individual income, no tax on business profits, no tax on gifts, no tax on inheritances, and limited taxation on consumption (like sales tax or VAT). The net result looks a lot like Switzerland– a bright, clean, beautiful, prosperous country that consistently has some of the world’s lowest unemployment.

It’s not like Andorra is sitting on a huge oil reserve. This place is high up in the Pyrenees Mountains. There’s barely any place to grow a turnip around here, let alone drill for oil. No, Andorra has prospered because the country has set the right conditions that attract productive people and their capital, similar to what Hong Kong has done.

Prices here are reasonable. In fact, it’s much cheaper than Spain with quality as nice as Switzerland. Crime in Andorra is… well… it isn’t, basically. Standard of living is among the best in the world, and Andorrans even have the fourth highest life expectancy in the world at 82.43 years (compared to 81, 80, and 78 in Canada, UK, and United States).

With such a fantastic model right on its borders, its absolutely mind boggling that politicians in Spain, and the rest of Europe for that matter, refuse to take a page from Andorra’s playbook and set conditions for success.

About the Author

Simon Black is an international investor, entrepreneur, and founder of Sovereign Man. His free daily e-letter Notes from the Field is about using the experiences from his life and travels to help you achieve more freedom, make more money, keep more of it, and protect it all from bankrupt governments.