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Sound Money Blog

We are Taxed Enough Already

Posted by
July 18, 2014

Today’s T.E.A. party adherents have it right. We are Taxed Enough Already! So why is raising the inflation tax gaining popularity with policymakers around the world?

The central idea of post WWII monetary arrangements was that the US dollar would be firmly pegged to gold at a fixed rate and the rest of the world would peg their currencies to the mighty—and stable—US dollar. For this to work, the US had to maintain fiscal discipline and resist the temptation to monetize the legacy war debt. It actually worked pretty well for about two decades.

By the mid-1960s, President Johnson found it all very inconvenient for his plans to simultaneously prosecute a war in SE Asia and also ramp up domestic programs to build a “Great Society”—while not going to Congress for more taxes to pay for it. His valid concern was that if Congress debated the need for higher taxes they might conclude the nation could not afford to spend more on both guns and butter. Instead, LBJs economic advisor, Arthur Okun, later said the president planned to get the Federal Reserve to pay for the accelerated spending. Okun claims to have said, “But Mr. President, that will just cause inflation, and inflation is just a different way to tax people.”The President is reported to have replied, “I understand that, but no one has to vote for it.”

LBJ clearly understood what kings, emperors, and other rulers have known for ages—debasing the national currency is a reliable stealth tax. When politicians are faced with the always difficult tasks of restraining spending or increasing explicit taxes of various types, resorting to the implicit tax of inflation looks like a lesser (political) evil.

But inflation is a really bad type of tax, and in view of today’s hand-wringing over wealth inequality it is an especially bad tax. First, the inflation tax is highly regressive—the poorest get hit the hardest. People who rent—rather than own—their homes and work for relatively low wages and earn few capital gains, suffer falling standards of living. The regressive tax of inflation is clearly politically divisive, straining the social fabric as middle and upper income home owners with fixed-rate, long-term mortgage are being made better off and the low income renters are struggling to get by.

Nevertheless, even the news pages of the Wall Street Journal join other major news organizations in lamenting “too low”inflation and cheering on policymakers to pursue ever higher inflation targets. This, while the opinion pages of the WSJ consistently explain that higher taxation retards economic growth. That includes taxation via inflation. After-tax, after-inflation, real rates of return on people’s savings are reduced or even become negative, relative prices of both real and financial assets become less reliable because of the uncertainties about future purchasing power of money, and future real tax liabilities are sure to be greater because of indexing of tax rates. Contrary to popular myth, higher inflation is not conducive to higher growth.

It is hypocrisy for politicians and journalists to bemoan the legacy wealth distribution while cheering for greater reliance on higher inflation taxation which surely will make matters worse. The T.E.A party needs to make it clear: opposing higher taxation includes the implicit tax of debasing our currency through inflation.

3 Comments

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  2. AllThingsMe July 21, 2014 3:40 PM

    Aren’t the policymakers that support higher inflation targets the same ones backing legislation designed to reign in the rising cost of healthcare and college loans?

  3. Hal Cabot July 21, 2014 10:45 AM

    Ah, but what evidence is there that politicians would stop inflating the currency just because they were already collecting higher taxes? The appetite for government programs is growing exponentially, and the more it is fed the more it grows.