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Please Steal From Us – A Lesson From TIPS

by John Newren CPA on February 12, 2009 · 12 comments

Reading time: 5 – 8 minutes

[Editor’s Note:  Please leave your comments.  Years ago I addressed this in a paper where I asked two questions:  Whether there is a right to currency and if so whether that right vests with The People or the government.  This is the first post from John Newren, CPA who is a tax accountant with a big four accounting firm.  These views are his own and do not reflect the views of his employer.]


While perusing the internet scrounging for investment vehicles I stumbled across an article suggesting Treasury Inflation Protected Securities (TIPS).  With TIPS the government agrees to borrow FRN$’s at a specified interest rate.  The creditor receives interest payments based upon the invested principal.  Also, the government promises to adjust the principal periodically throughout the year to reflect the loss of purchasing power resulting from inflation during the period.

On its face, this appears like a safe and secure investment.  The creditor receives modest interest income by lending capital to the government and are compensated for it and therefore do not bear the downside risk of devaluation through inflation.  Surely many retirees must feel warm and fuzzy with this instrument that performs like a stock that pays both a cash and stock dividend.  As the instruments are guaranteed by the venerable United States government surely any investment advisor could recommend TIPS to anyone.


A deeper review reveals a dirty little government trick.  But first a question.  Assume 0% interest.  If you invest $100,000 in TIPS for a year and the government  declares the  inflation rate to be 3% and after a year you redeem at $103,000; did you make an economic profit?  Did you have a gain on your investment? Technically the government’s own decree is that you have not had economic profit.  The TIPS principal is in the exact same economic position as a year earlier.

This is fine until you file your tax return and the government attributes to you $3,000 of taxable income.  The less astute may not bat an eye as the government is simply doing what it does best, taxing you.  The government concedes no economic profit because of inflation but still assesses a taxable gain.

If you assume a 25% tax rate, that would mean the government has managed to rob almost 1% of your purchasing power in just 1 year.  Yet, no one complains because the amount of FRN$’s increased overall.  Over 15 years the loss of purchasing power would be a slightly over 10% by investing in the very instrument the government asserts is designed to protect you.


This scenario plays out in hundreds of examples where there is a taxable gain but an economic loss or loss of purchasing power.  Real estate, stocks, bonds and commodities are all affected by inflation and investors get taxed through inflation without representation or due process of law.  Have a 3% gain on real estate?  Pay tax and end up behind.  An 8% return on a stock portfolio? Well, 3% was courtesy of the government and now “the people” have the audacity to force you to give a share back.

Many assert that inflation is a tax.  I partially agree.  Theoretically in a predictable inflationary environment all assets rise together.  Real estate, stocks, bonds and commodities all rise as the illusory currency evaporates.  I am unaware of any government that permits concessions for currency debasement when taxing businesses and citizens.

This reveals the perniciousness of the inflation tax which results when there is either no economic gain or an economic loss yet taxation still results, it is unavoidable and pervasive.  Even worse, the poor are most affected as they have no assets to rise with the illusory tide.

A gold ounce is an excellent example.  In 2001 a gold ounce is purchased for $275.  In 2008 the gold is traded for either $975 FRN$s or the equivalent amount of goods or services.  The gain would be $700 even though the useless gold ounce did not change, grow or become scarcer in the world.  Now the government demands a $200 share.  Why?!?

Well, the government assert there is a gain and they want their cut whether they deserve it or not and are willing to use force to get it.   Gold is especially painful because of the automatically higher tax rate which is instituted to make it less competitive as a currency in ordinary daily transactions.  This is an splendid reason to support sound money legislation like the Indiana Honest Money Act.


I am not among the gold bugs that assert gold is a perfect inflation indicator because I find that with the random volatility, or lack thereof in the 90’s, gold is too volatile in the short run.  Nevertheless, in the long run gold has been a great indicator of a competing currency’s value and is signaling that almost all are eroding fast.  Even worse; all the governments are taxing businesses and citizens the entire way down during the great credit contraction.

This is a wonderful example of why businesses and individuals play tax games to reduce their exposure.  But they are not the only ones.  Who decrees the inflation rate used in the TIPS calculation?  Yep, that same government that promised to adjust the TIPS so the investor would remain whole … before the taxes of course.  There is surely no conflict of interest and people like John Williams of ShadowStats must be loony to assert that the inflation rate is understated.  For these reasons TIPS are almost always an invitation, not that they care to ask, from the government to steal from holders of capital.

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ABOUT THE AUTHOR: John Newren, CPA holds a Master of Accounting in Tax from Brigham Young University and works as a tax accountant for KPMG in foreign currency, software, corporate and real estate taxation. This is merely one article of 2 by .
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{ 8 comments… read them below or add one }

1 Ross February 13, 2009 at 6:54 am

Nice article. Another fear with TIPS is that the government will mess with the factors used to get the inflation rates built into TIPS to curb their effectiveness. To me it is just like the fox guarding the hen house. Buy gold and silver

2 David February 13, 2009 at 3:41 pm

Good article John. Is there such thing as good taxes and bad taxes? I guess my question is…is it morally wrong for the government to tax your gold capital gains? Is there a code that taxes are supposed to follow? All taxes are stealing, right? so what makes a good tax vs a bad tax.

I tried to argue with a friend once that we should do away with the income tax, but got stuck trying to argue that a consumption tax is more “right”. Is there any moral compass we can turn to when it comes to taxes, or just what the government wants to do?

3 Trace Mayer, J.D. February 13, 2009 at 3:55 pm

I think the central issue in political theater is when is the use of violence justified?

People are all over the map on that issue. As I wrote about with Tallan Lanz on 26 Dec 2008 some immoral people clamor for using violence to prevent a child from playing an instrument on private property where alcohol is served. As taxes are government actions and whereas governments actions are ultimately backed up with intimidation or lethal violence I think focusing on that central issue is important to determine what is ‘good’ and ‘bad’ or ‘right’ and ‘wrong’.

4 John February 14, 2009 at 1:00 am

I am not a believer that all taxes are bad unlike my uber-libertarian anarchists. I believe that all people should have equal protection under the law and sadly that will cost money, but in order to do so, it has to be owned by the people, kind of like a huge HOA so to speak. Also, it isn’t unfair to have a disproportionate amount of taxes being borne by the rich because they are usually the ones who benefit the most from the “equal protection” because they have more stuff to protect. I disagree with the monopoly of violence argument as well. The people should have the power not the richest man who can buy this biggest guns.

The problem with capital gains taxes is the establishment of the gain. As you can see from my article, how to you determine exactly how much of it is a gain, especially if the government has complete control of the money supply? For this reason, it it tends to serve as a bad tax because the government just ends up robbing you.

I suppose the morality of tax lies both within the method and the purpose. Income taxes come by force, consumption taxes come by choice. If you don’t want to pay taxes, don’t buy anything. That is the strongest moral argument. As to the purpose, a good rule of thumb is to remember that forced charity is another word for slavery. So the extent the tax is welfare-ish, it is immoral. I like things like policemen, firemen, judges and even soldiers. These things costs a bit of cash but help to protect the rights of the people.

To better address I would probably have to try another article as it would take more time to flesh out better.

5 Steve Kurtz February 14, 2009 at 5:13 am

The fact that credit based fiat currencies demand growth of economic activity to produce profits to pay interest results in inflation as a perpetual disease. Resource bottlenecks on a finite planet will at some point result in a steady state economy. Ditto for a stable or shrinking human population. A basket of commodities (including precious metals)as backing would match currency values to the real economy far better than adjustments to interest rates or beggar thy neighbor intervention.

6 Sylvan July 8, 2009 at 10:09 pm

(yes, old article…)

TIPS are even worse than mentioned. As another commented, the inflation rate might be jiggered (probably is, see shadow stats) to understate inflation. But paying taxes on the gains and understating inflation together are only half the problem.

The killer for TIPS, in my opinion, is that after you are adjusted up $3000 due to inflation and the government makes you pay taxes on that unrealized “gain,” the next year they might jigger the inflation numbers to show deflation and so then they adjust your TIPS down by $3000. Now you are back at 0, except y0u had to pay taxes. Then up the next year and collect more taxes, and down to take it all away, and up and down and up…

TIPS are a guarantee you won’t be winning. It’s like Calvin Ball… If you play their game, who do you think is going to lose? The ONLY chance of winning is to step outside their game. No guarantees there, but that means you do have a chance.


7 Richard April 5, 2011 at 6:59 pm

My wife and I would like to invest in gold and/or silver. Are there 1. Sales taxes on the purchase of these metals?, and 2. Are there capital gains taxes that must be paid on these investments? In summary, what are the tax laws and liabilities which come into play if we invest in and start compiling a horde of Silver Eagles?

8 Trace Mayer, J.D. April 5, 2011 at 9:39 pm

Richard, those are good questions. Sales taxes will depend on the state you are in. If you order from an out of state dealer like Apmex then sales tax is likely not due. Some states have odd sales tax laws like California which assesses sales tax only on transactions below $1000, if I remember correctly. There may be capital gains taxes due and they are usually at a 28% rate as a ‘collectible’. But this can be complicated when buying American Silver Eagles because they are ‘legal tender’ and there is no intelligible definition in federal law to the issue of What Is A Dollar? This leads to great uncertainty in the law and unpredictability. Another issue is enforceability because of the tremendous privacy rights associated with gold and silver which is a reason they stand as an essential check and balance in the political machinery.

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