General

Re: Okay, the "inflation tax" argument is weakened for me!

FleetCenturion — Wed, 31 Aug 2011 07:54:15 GMT

Governments used to have to relay on direct taxation to pay for their parasitical existence. This was problematic for them, because people could avoid taxes, move elsewhere, or stage a coup. Then the 1930’s came, and the U.S. Government figured out a way to take our money out of every paycheck before you ever saw it.

Today, it’s so much simpler. Whether or not you pay taxes, are a citizen, or even live in the U.S., you are taxed without knowing it. The value of every dollar you earn, have earned, or will earn, sucked out of your savings in exact proportion to what government wants to spend. The higher and higher taxes that you pay afterwards are just to cover the interest to the Fed.

Re: Okay, the "inflation tax" argument is weakened for me!

Peter Sidor — Tue, 30 Aug 2011 09:47:40 GMT

Federal Reserve being the largest owner of US treasuries: pretty damn good.

Cartelizing the banking industry to support you with your deficit spending: priceless.

Re: Okay, the "inflation tax" argument is weakened for me!

z1235 — Tue, 30 Aug 2011 03:40:43 GMT

Prateek Sanjay:

It's just that inflation tax is small peanuts for the government.

Because an intern (visiting scholar) at the St. Louis Fed calculated it to be so with (gasp) formulas?

Re: Okay, the "inflation tax" argument is weakened for me!

Prateek Sanjay — Tue, 30 Aug 2011 02:33:35 GMT

z1235:

You just discovered that a living and healthy host may be in the best interest of every engorging parasite (i.e. dead host => dead parasite). Good work.

That's not the entirety of the point.

It's just that inflation tax is small peanuts for the government. It won't amount to more than $13 billion in 1982 dollars. I used to believe, "Does it matter what the tax rates are, when the government can inflate itself to get its money, and make people pay an inflation tax instead?" The truth is that of course it matters, because inflation tax makes so little money for the government, that governments tend to stick to direct tax.

If the government declared a monopoly on salt, and sold it at its own prices, it would make far more than the meager inflation tax sum. The argument that governments use central banks to inflate themselves into having money is...well...not really significant in practice.

Re: Okay, the "inflation tax" argument is weakened for me!

James — Mon, 29 Aug 2011 18:11:00 GMT

I don't know Prateek, you could most likely demonstrate that the income tax produces a laffer curve like that - i.e. increasing govt revenue to a certain point, then decreasing revenue - simply because fewer people pay income tax and there is less productivity when taxes are so high.

That doesn't mean that an income tax is not a tax. It's always about fleecing the sheep and not skinning it.

Besides which, it's fairly obvious that this will happen... The government's revenue is being measured in the same thing that is being debased. The tax works in terms of transfering real assets and wealth - it's about purchasing power, and who's purchasing power is prejudiced in terms of who gets to spend the money first.

Remember that the state is not a person with rational self-interest - it's a hat passed around and worn by the current looter-in-chief. It's a grenade with the pin taken out, and everyone hoping they won't be holding it when it goes off.

Re: Okay, the "inflation tax" argument is weakened for me!

z1235 — Mon, 29 Aug 2011 18:07:27 GMT

You just discovered that a living and healthy host may be in the best interest of every engorging parasite (i.e. dead host => dead parasite). Good work.

Re: Okay, the "inflation tax" argument is weakened for me!

Autolykos — Mon, 29 Aug 2011 18:04:41 GMT

That's right. It's an indirect or "stealth" tax.

To address the OP directly, the fact that governments lose out with inflation in the long run in no way means that they'll never resort to it. Look at the Roman Empire, for instance. Its downfall could be argued to ultimately stem from its centuries-long debasement (i.e. primitive inflation) of the currency.

Re: Okay, the "inflation tax" argument is weakened for me!

Wheylous — Mon, 29 Aug 2011 17:54:27 GMT

I always thought people said that it functions as a tax not because it makes money for them but leaves you will less purchasing power.

Okay, the "inflation tax" argument is weakened for me!

Prateek Sanjay — Mon, 29 Aug 2011 17:31:24 GMT

I always thought that an effective argument against inflationary policies today is that it effectively functions as a tax on the general public, a weakening of the future purchasing power of others to allow the fast money (state authorities) to acquire more assets cheaply and early.

http://research.stlouisfed.org/publications/review/92/03/Seigniorage_Mar_Apr1992.pdf

Hmmm...

A German economist points out that government sometimes loses money on...well...the production of money! A chart shows that during 1952-1963, the US government had a loss on its money production.

And if rate of price inflation goes beyond a particular level, the inflation tax ends up cutting into the government's own earnings from inflation. As such, monetary authorities have to avoid such a situation that price inflation goes so high that it's a negative for government revenues. So they are on the same page as us.

Moreover, even if they managed to find the right amount of inflation to profit maximise their revenues from inflation by itself, what they'll earn is....peanuts in many cases. In the best case scenario, they may earn the budget of three months of a food stamp program from it.

Note that I do not say that the inflation tax is a wrong concept. In broken Third World countries it's a clear reality. Pakistan's government earns little from direct tax revenues, which come almost exclusively from Karachi, and their government runs far more on printing of money. Even so, inflation tax is a tax that backfires on the government, since the government itself eventually ends up bearing the cost of it.