Inflation Tax

10 Key excerpts on "Inflation Tax"

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  Remembering Inflation

  • Brigitte Granville(Author)
  • 2013(Publication Date)
  • Princeton University Press

    (Publisher)

  In other words, the relation between the inflation rate and the Inflation Tax is not one to one. Cagan’s (1956) study of the monetary dynamics of hyperinflation, while investigating the inflation rate that will maximize government revenue, shows that the demand for real cash balances is a function of the expected inflation rate, which is in turn dependent on the actual inflation rate. While the existence of a Laffer curve for this Inflation Tax makes sense intuitively, Heymann and Leijonhufvud (1995: 20) highlighted the difficulties that researchers have encountered in identifying a definite maximum in the curve. The above-mentioned effect of inflation in discouraging money demand (because the cost of holding nominal balances rises) plays out in practice in the form of various strategies for economizing on money holdings. Peo-ple reduce their currency holdings and banks reduce their excess reserves, thereby decreasing the monetary, hence the tax, base. With regard to bank reserves, if reserve requirements imposed are perceived as too high, either depositors reduce their deposits or banks evade the relevant regulations, as was the case in Russia in the 1990s (Granville, 1995). Of course the government can always issue more currency, but only at the risk of higher and higher inflation. Monetary innovations develop accordingly to reduce money holdings. For example, payment periods are shortened. Also bank demand deposits begin to carry interest. Eventually the monetary base falls so much that the government’s Inflation Tax revenue decreases. Another difficulty of using inflation to bolster government revenue is the way that long collection lags of conventional taxes erode the real value of explicit ordinary fiscal revenues (Tanzi, 1978). When considering opti-mal inflation, the issue of tax collection lags has to be taken into account.

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  Finance in Developing Countries

  • P.C.I. Ayre(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  The Inflation Tax in Developing Countries 1 by W. T. Newlyn * The concept of the Inflation Tax is best described initially by the following quotation from Harry Johnson: In order to maintain its real balances constant in the face of inflation, the public must accumulate money balances at a rate equal to the inflation; this accumulation of money balances in order to preserve real balances is achieved at the cost of sacrificing the consumption of current real income in order to maintain real balances intact, the release of current real income constituting the equivalent of a ‘tax’ on the holders of real balances; the tax on real balances, in turn, accrues as revenue to the beneficiaries of the inflationary increase in the money supply. [ Johnson, 1967, Ch. III.] A qualification must be made as to how the ‘tax revenue accrues to the beneficiaries’. The use of the term ‘tax’ does not imply that the beneficiary is necessarily the government; it may be a private institution which is enabled to appropriate the real resources given up by money holders. In this respect there is a strong similarity between the forced saving resulting from inflation and what the present writer has called the ‘involuntary saving’ resulting from the need to accumulate transactions balances associated with real growth [ Newlyn 1962: 162 ]. The distinction is that in the latter case real balances increase whereas in the case of the Inflation Tax nominal balances have to be accumulated in order to maintain a given level of real balances

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  Quantitative Easing As A Highway To Hyperinflation

  • Imad A Moosa(Author)
  • 2013(Publication Date)
  • WSPC

    (Publisher)

  Chapter 1

  INFLATION, DEFLATION, DISINFLATION AND ALL THAT

  1.1.What is Inflation?

  It is often said that inflation is inevitable, like death and taxes. This is probably because, as Sir Frederick Keith-Ross mentions, “inflation is like sin; every government denounces it and every government practices it” (Makochekanwa, 2007). Historical stories about inflationary episodes proves that it is a phenomenon that has existed ever since money was used as a medium of exchange. Inflation is a topic that receives significant attention in the media, with regular features, reports and interviews. It is an issue that is often debated by politicians in Parliament and election campaigns, let alone economists and business executives.

  The reason why inflation is treated with “respect” is that it affects everybody in various ways. It is an important consideration during mortgage payments and in determining the cost of essential goods and services required for survival and those that make our lives more pleasant. We anticipate news about whether the central bank will decide to cut or raise interest rates, with inflation typically being the prime consideration (at least for some central banks). Most of us are fascinated by documentaries on the great inflation in Germany during the 1920s and how it relates to the rise of Adolf Hitler. Inflation has broad implications for the state of the economy and whether or not we can keep our jobs or find new ones. While it is regarded as one of the four macroeconomic variables closely monitored by policymakers (the others being growth, employment and the balance of payments), it is often the prime indicator that triggers drastic policy actions. “Inflation targeting” is a more common concept than “output targeting”, “employment targeting” or “balance of payments targeting”.

  Inflation is defined in different ways, but, in general, the phenomenon is about rising prices of goods and services (hence, the cost of living). As the prices of goods and services rise, the value (or purchasing power) of money falls in the sense that a monetary unit (say a dollar) buys less and less goods and services resulting in a diminishing basket. This is why inflation is viewed as a “persistent” erosion of the value of the money. While it cost 60 pounds to purchase a first class ticket on the Titanic in 1912, there is no way these days that this amount can buy a ticket to cross the Atlantic (let alone the Pacific) in a first class cabin on an ocean liner (perhaps 10,000 pounds can do the job). It is for this reason that we give our children more pocket money than what our parents gave us. People are typically nostalgic to the “good old days” when things were very cheap — the culprit being inflation.

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  Fundamentals of Engineering Economic Analysis

  • John A. White, Kellie S. Grasman, Kenneth E. Case, Kim LaScola Needy, David B. Pratt(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  In this chapter, we examine the before-tax and after-tax effects of inflation on the eco- nomic worth of an investment when capital is borrowed and when it comes from retained earnings. We show that inflation can significantly impact the economic viability of a capital investment. For that reason, when comparing investment alternatives in an inflationary economy, it is important to give explicit consideration to inflation. 3. Inflation rates in the United States have been fairly steady in recent years. Does Caterpillar need to develop different business strategies for its ventures within and outside the United States? 4. The inflation rate in different regions of the world is outside Caterpillar’s control. What can the com- pany do to protect itself from the adverse effects of inflation, such as rising commodity or component prices and rising labor rates? 10.1 The Meaning and Measure of Inflation LEARNING OBJECTIVE Quantify the effects of inflation on purchasing power with the inflation rate. Consumers understand the impact of inflation on their ability to purchase goods and services. As the value of a dollar diminishes over time, the effects of inflation are mani- fested. More precisely, we can say that inflation is a decrease in the purchasing power of money that is caused by an increase in general price levels of goods and services without an accompanying increase in the value of the goods and services. Inflationary pressure is created when more dollars are put into an economy without an accompanying increase in Inflation A decrease in the purchasing power of money that is caused by an increase in general price levels of goods and services without an accompanying increase in the value of the goods and services. Systematic Economic Analysis Technique 1. Identify the investment alternatives 2. Define the planning horizon 3. Specify the discount rate 4. Estimate the cash flows 5. Compare the alternatives 6.

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  Monetary Economics in Developing Countries

  • Subrata Ghatak, José R. Sánchez-Fung(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  One may conclude tentatively that the value of b at low rates of inflation may differ significantly from its value at high rates, so that the rate of inflation that maximizes revenue to the issuers of money is probably not much more than 10 per cent in most cases. (It must be noted, however, that Newlyn argues on the basis of his results that, in most cases, revenue would be increased by raising the rate of inflation to 30 per cent.) In considering the efficacy of using a tax on cash balances as a means of increasing the level of investment in the economy, it is essential that the relationship between inflation and the revenue from other taxes, already referred to above, is not ignored. In developing countries, the tax structure and administrative mechanism are likely to mean that quite mild inflation will reduce real tax revenues. (In addition, real expenditure may rise as a consequence of public utility rates remaining fixed in the face of inflation, leading to increasing deficits which must be financed by the government.) This is a consequence of the much lower degree of progressiveness in the tax structure, as compared to developed countries, a high degree of reliance on specific taxes and, most important of all, often significant lags in tax collection. The full implications of these features of developing-country tax structures with illustrative calculations have been thoroughly discussed by Tanzi (1977, 1978). Two examples from Indonesia will help to show the importance of this consideration. Aghevli and Khan (1977), in the study already quoted, showed that the share of tax revenue to national income when prices are stable is 10.1 per cent. At the rate of inflation that maximizes Inflation Tax revenue (6 per cent of national income) other taxes fall to 5 per cent of national income. Hence, the net effect of inflation at a rate of over 150 per cent per annum is to produce a net rise in revenue to the government of less than 1 per cent of national income.

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  The Costs and Benefits of Price Stability

  • Martin Feldstein(Author)
  • 2007(Publication Date)
  • University of Chicago Press

    (Publisher)

  For the United States, the restricted set of benefits that I quantify substantially exceed (in pres- ent value at any plausible discount rate) the cost of getting to price stability from a low rate of inflation. Table 1.1 summarizes the four types of welfare changes that are discussed in the remaining sections of the paper. The specific assumptions and parameter values will be discussed there. With the parameter values that seem most likely, the overall total effect of reducing inflation from 2 percent to zero, shown in the lower right-hand corner of the table, is to reduce the annual deadweight loss by between 0.76 percent of GDP and 1.04 percent of GDP. 1.1 Inflation and the Intertemporal Allocation of Consumption Inflation reduces the real net-of-tax return to savers in many ways. At the corporate (or, more generally, the business) level, inflation reduces the value of depreciation allowances and therefore increases the effective tax rate. This lowers the rate of return that businesses can afford to pay for debt and equity capital. At the individual level, taxes levied on nominal capital gains and nomi- nal interest also cause the effective tax rate to increase with the rate of inflation. A reduction in the rate of return that individuals earn on their saving creates 13 Capital Income Taxes and the Benefit of Price Stability a welfare loss by distorting the allocation of consumption between the early years in life and the later years. Since the tax law creates such a distortion even when there is price stability, the extra distortion caused by inflation causes a first-order increased deadweight loss. As I emphasized in an earlier paper (Feldstein 1978), the deadweight loss that results from capital income taxes depends on the resulting distortion in the timing of consumption and not on the change in saving per se.

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  Public Sector Economics

  Made Simple

  • D. I. Trotman-Dickenson(Author)
  • 2014(Publication Date)
  • Made Simple

    (Publisher)

  A government can dis-criminate by means of indirect taxes between home produced goods and imports. Protection through taxation depending on whose point of view it is looked at, can be regarded as a disadvantage or as an advantage. But in the long run it is not likely to be in a country's interest if it incites retalia-tion. (iv) Inflationary effect. Indirect taxes, by increasing prices, may add to inflationary pressure in the absence of an incomes policy. Employees faced with rising cost of living are likely to press for pay increases which push costs up. This, in turn, leads to further price increases and new demands for pay rises and cost-push inflation sets in. Some economists, however, regard indirect taxes as anti-inflationary in so far as they discourage consumption. All the disadvantages of direct and indirect taxation are intensified the higher is the level of taxation. To minimise the adverse effects of any one tax and to benefit from what are the 'desirable' effects of the others govern- The Theory of Taxation and the Tax System 85 Pattern of Taxation The nature of the pattern of taxation will depend on such factors as: (i) the administrative structure; taxes may be levied by central government only or by both the central government and local government, (ii) the level of economic development of the country, (iii) the amount of the revenue required, (iv) political party in power, different governments have their own ideological preferences, (v) policy objectives and (vi) what the people are prepared to accept. Table 6.1. Pattern of taxation: international comparison. Revenue from taxes on income, expenditure, capital and social security contributions as a percentage of total tax revenue including social security contributions in 1978 (figures for 1971 are shown in brackets).

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  Law and Inflation

  • Keith S. Rosenn(Author)
  • 2015(Publication Date)
  • University of Pennsylvania Press

    (Publisher)

  Inflation, therefore, discourages firms from making investments, particularly in capital intensive technologies with assets that have relatively long expected lives. Instead, it encourages firms to retain obsolete plant and equipment and to purchase inventory and capital assets with relatively short lives. 29 At the same time, firms have greater difficulty in attracting new equity capital because prospective inves-tors eventually perceive that relatively low rates of tax on corporate profits and capital gains are in fact very high rates when inflation is factored in. Martin Feldstein and Joel Slemrod recently analyzed the $4.6 billion in nominal capital gains on corporate stock upon which U.S. individuals paid taxes in 1973. Their study revealed that the $4.6 billion gain, when ad-justed for inflation, was actually a loss of nearly $1 billion. 30 The tax structure encourages spending and discourages savings by taxing savers on the nominal amount of interest income and permitting debtors to deduct the nominal amount of interest paid. This means that prospective investors insist upon higher rates of return, and that many investments that would have generated a sufficiently attractive rate of return in a stable economy will not be made in an inflationary economy. 31 Increase in Tax Evasion Substantial inflation has a decided tendency to increase the rate of tax evasion. 32 In Argentina high rates, coupled with the sentiment that paying an Inflation Tax and an income tax amounted to double taxation, spurred huge increases in the tax evasion rate. Tax ethics in Argentina, before inflation set in, were no better or worse than in the majority of the southern European countries, and perhaps they were better than in some of them. But . . . a feeling quickly spread that tax evasion was justified.

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  Inflation

  History and Measurement

  • Robert O'Neill, Jeff Ralph, Paul A. Smith(Authors)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Its influence in recent dec- ades has been significant in the development of economic policies by governments and central banks (for more on the history of Monetary Economics see: Dimand 2008). As a result of the focus this area of study has on the role of money, it has been the main area of economics which has made use of and developed the thinking around inflation. In this section, we will attempt to highlight the main principles developed in this area so that the measurement of inflation can be better under- stood and related to discussions of macroeconomic theory. However, 2 What Is Inflation? 25 given restrictions of space, it will, by necessity, be a high-level summary of some key statements related to the area. One of the key theories related to the study of inflation in Economics is the quantity theory of money, 5 which, broadly stated, posits that an increase in the quantity of money in an economy, or money supply, will lead to an increase in the level of prices. From our definition of inflation, we can see that this price level increase will also result in a fall in the pur- chasing power of money, hence defining a reciprocal relationship between the price level and the purchasing power of a unit of currency or its value. As individuals will tend to want to hold more units of a currency as the purchasing power of that currency falls, it is fair for us to expect the demand for money to exhibit a negative correlation with the purchasing power of money. This is the same as saying there will be a positive relationship between the price level and the amount of money which people would like to hold.

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  A Tract on Monetary Reform

  • John Maynard Keynes(Author)
  • 2018(Publication Date)
  • Papamoa Press

    (Publisher)

  On whom has the tax fallen? Clearly on the holders of the original 9,000,000 notes, whose notes are now worth 25 per cent less than they were before. The inflation has amounted to a tax of 25 per cent on all holders of notes in proportion to their holdings. The burden of the tax is well spread, cannot be evaded, costs nothing to collect, and falls, in a rough sort of way, in proportion to the wealth of the victim. No wonder its superficial advantages have attracted Ministers of Finance.

  Temporarily, the yield of the tax is even a little better for the Government than by the above calculation. For the new notes can be passed off at first at the same value as though there were still only 9,000,000 notes altogether. It is only after the new notes get into circulation and people begin to spend them that they realise that the notes are worth less than before.

  What is there to prevent the Government from repeating this process over and over again? The reader must observe that the aggregate note issue is still worth $36,000,000. If, therefore, the Government now prints a further 4,000,000 notes, there will be 16,000,000 notes altogether, which by the same argument as before are worth $2.25 each instead of $3, and by issuing the 4,000,000 notes the Government has, just as before, transferred an amount of resources equal to $9,000,000 from the public to itself. The holders of notes have again suffered a tax of 25 per cent in proportion to their holdings.

  Like other forms of taxation, these exactions, if overdone and out of proportion to the wealth of the community, must diminish its prosperity and lower its standards, so that at the lower standard of life the aggregate value of the currency may fall and still be enough to go round. But this effect cannot interfere very much with the efficacy of taxing by inflation. Even if the aggregate real value of the currency falls for these reasons to a half or two-thirds of what it was before, which represents a tremendous lowering of the standards of life, this only means that the quantity of notes which the Government must issue in order to obtain a given result must be raised proportionately. It remains true that by this means the Government can still secure for itself a large share of the available surplus of the community.

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