Is Inflation a tax? If so, is it the most regressive tax we pay?

Prescott Valley Correspondent-With inflation not being under direct government control or managed by a federal or state taxing authority, like the Internal Revenue Service (IRS), it is not going to be considered a direct tax, though inflation certainly has effects that are tax-like in nature.

Inflation would be considered more of an indirect tax as it does take a citizen’s spending power out of their hands and transfers it to government entities and other areas of government interest, and this whole process goes along with the view of taxes as money that would have been spent on items and things that were going to be used elsewhere but are, in turn, passed on to the government or other government sponsored sources.

The economy has its own direction through capitalism and free-markets, and inflation is one of the effects of the driving forces of this type of economic system. Government definitely has influence over the economy through certain regulations, laws and indicator reports for different sectors, but the economy does have its own direction and flow in spite of considerable government influence.

Inflation is defined as an overall increase in prices of goods and services to consumers and others. It is impacted by supply and demand, and a sudden surge of demand will produce more inflation as there are more buyers for the supply level. The same is true of a drop in supply as it will drive inflation as well, as there is less of a supply for the same level of consumer demand.

When inflation eats into the purchasing power of citizens, you have to think of it as a regressive tax, just as regular taxes cut into purchasing power. Taxes that take a larger percentage of a lower income and a smaller percentage of a higher income define a regressive tax. When basic necessities become a greater percentage of overall expenditures of a lower income individual or population, it produces a regressive tax situation.

The government’s spending power is increased when money can be printed and put into circulation at the drop of a hat, particularly when the cost of printing it is minimal, which makes the money appear as though it is free for the taking and use. The new money printed can be distributed to government projects, individuals and other causes without ordinary citizens making waves because the money has the appearance of being free, but it is not. The new money is put in with money that is already in existence, such as people’s savings, salaries, investments and any other monies. This action creates a watering down of money and makes citizen’s money worth less. In this process, inflation becomes a hidden or indirect tax.

Unless citizens are aware of an inflationary period, they will not be as well prepared for the increased costs of goods and services in extended periods of inflation. They will experience the sting as though they are being directly taxed. When the government takes on areas of control, such as health-care, educational programs, more entitlements and welfare programs, these kinds of assumed government responsibilities are paid for through additional tax loads. More often than not, these loads are placed on the middle and lower classes in the form of higher costs of goods and services. These citizens find themselves being taxed indirectly because their buying power and savings are diminished.

As long as the demand for goods and services expand and people are paying inflated prices for the most basic of necessities, the extra money allocated towards those higher cost goods and services will be thought of as an indirect or regressive tax. The only things a regressive tax teaches middle and lower class individuals are austerity and thinking about their purchases and investments long and hard. Deprivation and pain go along with decisions that involve inflation, but it does awaken individuals as to how to deal effectively with the current monetary system and how they can be a part of adjusting and changing it to help eliminate regressive taxes.

Owatonna, MN Correspondent-The Merriam-Webster dictionary defines the word tax as: ” a charge usually (my highlight) of money imposed by authority on persons or property for public purposes.” “Usually” implies other means exist of taking assets from a taxpayer. If assets are taken from a taxpayer, that taxpayer has less money to spend. Since inflation also reduces purchasing power by increasing the price of goods and services, one can conclude that inflation is by definition a tax since it has the effect of reducing the assets of a taxpayer.

Since the Federal Reserve (The Fed) was created in 1913, more often than not the official policy of the Fed’s Board of Governors has been to encourage a moderate amount of inflation. Why? Because deficit spending came into vogue around that time and has continued at an accelerating pace. Deficit spending benefits a government when it doesn’t levy direct taxes on taxpayer income or purchases that will cover the amount of that extra spending. It’s akin to a consumer who buys on credit and is only concerned with earning enough to make interest payments on the debt. Of course, the housing bubble of 2007 illustrated how dangerous it can be to overextend one’s credit. But since the government also controls the printing presses and can create money as needed to make interest payments, they can extend the pretense of a high level of service combined with low taxes much longer than most individuals are able to do.

Government benefits from inflation by paying off debt with cheaper dollars each year. Because inflation raises wages as well as prices (but wages almost always rise more slowly than prices), tax revenues increase. This gives more income to the government, which allows it to increase its debt and debt payments.

Financial institutions such as banks love inflation because the new money created to finance government debt goes to them as loans from the Fed. They, in turn, lend this money to consumers at a much higher rate of interest. Obscene profits are possible if one borrows at say, one percent interest, then turns around and lends that new money to a consumer who must pay four percent interest. Nice work if you can get it.

Since 1913, the purchasing power of the dollar has declined approximately 96% based on the Bureau of Labor Statistics CPI Inflation Calculator. One hundred years ago, a typical family with several children survived adequately on one income, usually the father’s. Today, the average family with several children struggles to pay their bill when both parents work, sometimes at multiple jobs. Yes, wages have risen. Yes, consumers demand more goods and services than in 2017 than they did in 1917. Yes, planned obsolescence by manufacturers keeps consumers spending more money to replace worn out or obsolete products.

So, it’s difficult to say with certainty that inflation is the most regressive tax we have. But if we agree that inflation is a tax, we must agree that it affects all taxpayers. If so, those with the least amount of income are affected the most since they rarely have any savings to cushion the effects of continually rising prices for essential goods and services. Inflation may not be the most regressive tax, but it is the leading candidate.

Gastonia, NC Correspondent-I’m not an economist, and I don’t even play one on TV, nor do I ever stay at a Holiday Inn, so the inner workings of the Dismal Science are far beyond my ken. I struggle to do my taxes, much less understand the cabalistic machinations of the Fed and the voodoo dances of the stock markets.

That said, to my layman’s knowledge, inflation is something that’s part of a free market economy. When a good or service becomes popular and in short supply, its price goes up. When people have more money to spend, prices rise so the sellers can make the most money possible. When there is a massive oversupply, like with the crude oil market for the last few years, prices plunge and stay down until supply gets closer to demand.

Nowhere in there do I hear anything that approaches the definition of a tax. I do know that the Fed does things with the prime rate that affect the money supply and thus either encourage or discourage inflation, but I’m honestly not sure how much effect that has on the multi-trillion dollar behemoth that is the U.S. economy.

I do know that the government’s actions have an effect on the economy. I believe that under President Trump, there will be fewer fetters placed on the legs of the free market and that will be better for everyone. Yes, some prices will rise, and some goods may become more scarce as manufacturers are allowed more control over their operations. However, I have a deep faith in the sanctity of free enterprise, and I believe that in the end the market forces will win out and we’ll be far better off without Nanny State meddling trying to micromanage the economic course.

Or I could be wrong. Like I said: I’m not an economist.

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