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The Inflation Tax

You have probably heard politicians and economists use the term before. What they mean with "inflation tax" is that in reality inflation is a hidden tax. Long term inflation, you see, is generally caused by the government inflating the supply of money. In the extreme, they print up so much money that they destroy the currency. In normal circumstances, they find that it is easier to create money to loan to themselves than to raise taxes on the citizens. It really is an indirect tax.

The New Tax

My idea is that the inflation of the money supply be scientifically used to directly fund government. If, for example, the economy was growing at 4% per year, and the government printed and spent currency equal to that 4%, there should be no long-term inflation resulting. If you doubt this, look back to the late 1800s, when prices dropped for many years at a time because the U.S. government didn't produce more money to match the production of the economy.

Now, if we could live with, say a 2% inflation rate as a permanent feature of our lives, the system could work like this:

1. Each year the government calculates the growth in the economy for the previous year. This is to prevent unrealistic politically-motivated projections that might be used, if the tax was calculated on the coming year.

2. The government prints currency based on this growth, plus 2%. This is all that it can spend for the coming year.

No income taxes or other taxes are necessary. In fact, you no longer need to tell the government what you make. It is irrelevant. In practice, you cannot escape this tax as long as you use the currency, since each dollar's value is slightly decreased (taxed) by the printing of more.

As long as the basic rules are not violated, there is no danger of runaway inflation. The black market becomes irrelevant. Nobody's business or financial activities matter to the government, and there is no need for the IRS.

Another advantage of this system is that it is automatically indexed to economic growth, so there is little danger of high taxes killing a weak economy. When times are bad, the tax burden is automatically lowered. When times are good, more revenue comes in, and could even be set aside for future needs. (Am I a wild-eyed optimist, or what?)

Problems with the Inflation Tax

Of course the obvious objection is that the power to print money could be abused. Who want's the precedent of the U.S. Government just printing money for it's budgetary needs? Could they be trusted to stick to the rate of growth plus 2%, or to any set amount? Probably not, and that is the biggest problem with the old system or my new one.

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Inflation Tax