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
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.