| Revision as of 15:20, 14 February 2008 editHcobb (talk | contribs)Extended confirmed users, Pending changes reviewers14,753 edits Corrected minor math error, $1 is not the same as 105% of 95 cents.← Previous edit | Latest revision as of 01:00, 7 July 2017 edit undoLawrencekhoo (talk | contribs)Extended confirmed users, Pending changes reviewers, Rollbackers29,833 edits ←Redirected page to Seigniorage#Seigniorage as a tax | ||
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| An '''inflation tax''' is an ] ] for the economic disadvantage suffered by holders of ] and cash equivalents in one denomination of ] due to the effects of ], which acts as a hidden ] that subtracts value from those assets. Inflation tax is not a rigorous economic concept. | |||
| The ] views that inflation tax affects the middle and lower class the most. <ref></ref> Some argue that inflation is a ] ]. <ref>http://www.ssc.uwo.ca/economics/econref/workingpapers/researchreports/wp2000/wp2000_1.pdf</ref> | |||
| When central banks print notes and issue credit, they increase the amount of money available in the economy, usually as a reaction to worsening economic conditions. Through a change in real money balances this causes inflation. Financing expenditure in this way is called ] and the effect of increasing the money supply and causing the holders of money to pay an inflation tax is the most obvious cost of inflation. | |||
| If the annual inflation rate in the ] is 5%, one ] will buy $1 worth of goods and services this year, but it would require $1.05 to buy the same goods or services the next year; this has the same effect as a 5% annual tax on cash holdings. | |||
| Governments are almost always net ]s (that is, most of the time a government owes more money than others owe to it). Inflation reduces the ] of previous borrowing, and at the same time it increases the amount of revenue from taxes. Thus it follows that a government can improve the debt-to-revenue ratio by employing inflationary measures. | |||
| However, if the government continues to sell debt, by borrowing money in exchange of debt papers, these debt papers will be affected by inflation: they will lose their value, and therefore they will become less attractive for creditors, until the government will not find any willing to buy debt. | |||
| An inflation tax does not necessarily involve debt emission. By simply emitting currency (cash), a government will induce ] and may trigger inflationary pressures. Taxes on consumer spending and income will then collect the extra cash from the citizens. Inflation, however, tends to cause social problems (e. g., when income increases more slowly than prices). | |||
| =="Tax on the inflation tax"== | |||
| Although not meant by the term "inflation tax", a related effect is the tax on interest and investment "income" when the tax is levied against the ] or nominal gains. For instance, if someone buys a bond with 6% interest and inflation is 4%, their "real" interest is 2%. If, however, they are taxed 25% of the 6% interest "income", or 1.5%, this can be thought of as composed of a tax on real income (0.5%) and a tax on inflation (1.0%). The same principle applies to capital "gains" taxes not adjusted for inflation. In any case, this "tax on the inflation tax" is essentially equivalent to a tax on holdings ("wealth tax") equal to the nominal tax rate times the inflation rate (in example above, 25% of 4% inflation equals 1.0%.) This "property tax" can even apply to ''non-monetary'' assets as well as money earning interest. Thus, money itself is subject to both the inflation tax ''and'' the tax on the inflation tax, while other assets, on which nominal profit or gains taxes are imposed, are subject only to the tax on inflation. | |||
| Another negative effect of this tax is that even ]s carry inflation risk, as the inflation compensation is taxed. | |||
| ==References== | |||
| {{reflist}} | |||
| {{Tax-stub}} | |||
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Latest revision as of 01:00, 7 July 2017
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