The inflation tax

This is the time of year when Americans think a lot about the income tax.  But actually the income tax is just the most outrageous and notorious of a long list of taxes, imposed on nearly every activity of a citizen.  But as oppressive as all those taxes are, there is an enormous tax that goes largely unnoticed in this country:  the inflation tax.

Inflation occurs when the government expands the money supply to finance its debts.  The resulting increase in the supply of money devalues the money that is already in circulation.  This process, of course, is called inflation.

Inflation diminishes the value of not only the currency itself, but all assets whose value is denominated in that currency, resulting in increases in prices.  As such, inflation is particularly harmful to the poor and middle classes, those who have savings, and those on fixed incomes. 

Because it is created by the government and takes the property of its citizens, inflation is a tax.  Ben Bernanke, the architect of the current version of the tax, ackowledged this in Congressional testimony last July.  And this tax is not voted on by Congress or authorized in the constitution.  It is hardly more than theft.

Fans of the so-called “flat tax” must love the inflation tax.  It is the flatest tax of them all.  Every dollar in circulation is equally affected.  So the more money you have, the more inflation tax you pay, and the less money you have, the more the inflation tax hurts.   By the way, it seems that the inflation tax is the tax of choice for the Obama administration, which has dramatically increased federal spending but chosen to pay for it with the inflation tax, rather than a more traditional tax.

In fact, as I have pointed out before, our fiat money system makes old-fashioned taxation unnecessary.  The government could, if it wished, finance all of its operations through inflation alone.  Instead, it withdraws some money from circulation via taxation, while at the same time inflating what’s left behind through deficit spending.  This administration prefers to pay for only about one-third of its spending with traditional methods of taxation.  The remainder is paid for by the inflation tax.

This form of taxation not only destroys the value of the currency and disproportionately affects the poor and those on fixed incomes, it also destroys savings by inflating the saved dollars away at a rate faster than interest accrues on them.  The Federal Reserve has adopted a policy of not only creating inflation, and in so doing imposing a huge inflation tax,  but it also artificially depresses interest rates to assure that inflation will consume savings, forcing savers to spend their money rather than save it, or to gamble it in the stock markets or other speculative ventures that might have a chance to outpace inflation.

So let’s not be deceived.  When the government spends more than it collects we are being heavily taxed, whether there is an announced tax increase or not.  And when the Federal Reserve lowers interest rates to promote spending, it is simultaneously stealing some of our savings.

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