Why don’t we just tax through inflation? I was discussing various methods of taxation today (US current tax system versus the “Fair Tax”, etc.) and I started wondering why we don’t just tax through inflation. The government would have some sort of set budget, and instead of the various complicated ways it now has of determining what people owe nd collecting, it would just in a sense print whatever money it needs (although it would be in the form of bank credit not actual paper money). This would of course cause some inflation, but it would be counter balanced by the amount of money saved in payroll, property, and sales tax as well as the majority of the huge IRS budget. Rich people would be more affected because they are spending more money. If there was a consensus that this harmed people below poverty level we wcould just create a medical/food/shelter benefits program for those people.
I won’t be at all surprised if there is some glaring flaw in this scheme. I’m just wondering why it doesn’t work and why governments don’t use what seems like an easier system.
Have you ever heard of needing wheelbarrows full of money for a loaf of bread? People would stop using dollars and require physical goods in trade. It’s the perfect way to halt the economy.
Despite the above comments, this has been used for centuries and is quite popular today.
The result is not always ruin, although that is the risk.
Often the US and other major players will write off debts and revalue currencies to “bail out” economies that their richest people have a stake in.
Of course this is to the detriment of the non-rich, but they seldom enter into these decisions.
This is an interesting question. I guess it’s just a matter of how much money the government needs. Presumably, if the government were a sufficiently small operation, the money it would need to print would increase inflation only a little. Printing money would still be an effective way of increasing the overall share of national wealth possessed by the government. This must be the case or counterfeiting wouldn’t be profitable.
At some point, though, the government is so large that the amount of bills it would add to the economy would drive the value of each of those bills down too fast. Then you get run-away inflation like in the Weimar Republic. I wonder if there is some magical point where this happens—some kind of tipping point where printing bills becomes a losing proposition. Whatever it is, I expect that the United States Government is far past it.
Governments have three ways to pay their bills–taxation, borrowing, or printing money. Economists consider the third way to be worst. Printing money destabilizes the currency, which adds uncertainty to every transaction everywhere in the economy. Financial markets hate uncertainty.
The short-term effect of unexpected inflation falls hardest on people who have lent money out at a fixed rate of interest for a long period of time–people buying bonds to save for retirement, banks lending money to home-owners, and others. These may meet your definition of “the rich”–after all, they had money to lend out–but failing banks and insolvent retirees aren’t good for the country.
Over the longer term, people come to expect ongoing and unpredictable bursts of inflation. They build indexing into every transaction–from car loans to apartment leases to labor union contracts. This smooths the pain of inflation, making it more like a general tax, but adds unnecessary friction to commerce, slowing it down and leaving more people poor.
Finally, no country has a monopoly on currency issue, and currencies compete with each other. When a country plays games with its currency, investors shun it in favor of others who are more responsible. “Capital flight” ensues, and an economy without capital isn’t a happy place. Interest rates soar, stocks tank, and new business formation ceases.
Taxation may be annoying, but inflation is ruinous. Embrace it at your peril.
In the final analysis, money is a promise: that if you are willing to give up something of value- either material goods or labor- for these pieces of paper, eventually someone else will trade you something you want for the paper. Taxation calls back in those pieces of paper so the promise they represent is covered: the person being taxed is surrendering the goods and services the money might otherwise have bought. Printing money to pay your bills is in essence issuing an empty promise: that wealth can be created out of nothing and that no one ever has to actually give up something.
For example, as Cecil pointed out in his classic column What happened to all the gold Spain got from the New World?, even gold and silver are subject to this. The rulers of Spain assumed that specie was synonomous with wealth, and thought that they could pay their bills indefinitely simply by acquiring and spending more gold. But without balancing out the influx of specie with taxation, in the final result they were simply putting more metal on the market. They could get away with this for quite a while simply because of how desperately gold-starved Europe was before the New World conquests, but eventually it caught up to them.
By contrast, during the American Civil War the Union printed fiat money in the form of greenbacks but also taxed the bejeebus out of everything they could, minimizing the inflationary potential of the extra money. In fact, the expansion of the 19th century economy had led to the country being short of money, to the point that there was a movement to allow the greenbacks to remain in circulation after the period of time that the government was supposed to have called them all in.
And the South did half that: they printed money like mad, but didnb’t tax it. This seemed really good for the government at the time: free money, right?
Wrong. That free money collapsed the Confederate economy, causing immense suffering throughout the South. Indeed, the economic disaster hurt the war effort by making it difficult if not impossible to get needed war material. Plus, many soldiers deserted to bring in the crops, since it was often the only thing standing between their families and starvation. (The Confederate leaders, of course, declared that saving one’s family in such a fashion was trason, whereas their own utter incometence was just politics.)
I’m curious, by what manner does printing money actually increase wealth? I mean, at some level, the $100 in my wallet isn’t “more” of anything than the $1, other than a couple zeros. Money is an abstraction, always has been - but it shouldn’t be an absurdity…
Inflation is everybody trying to readjust their personal cut of a nation’s wealth back to what it used to be before sombody else devalued what they had.
My comment was motivated by the following simplified model:
If there are N bills in circulation, then each bill is worth 1/N of the total wealth in the society. Suppose, to keep things ridiculously simple, that our society consists of just you and me, and our money supply consists of just two bills, one in your possession and one in mine. Then my share of the wealth is 1/2 and your share is 1/2. Now, if I print an additional bill, all of the bills become less valuable. Now each bill is worth only 1/3 of the total wealth. However, despite that inflation, I’ve increased my share of that wealth to 2/3. In a sense, I’ve taxed you 1/6 of your wealth.
Anything that brings new value into a system without an equal offsetting inflation is wealth. Money is one subspecies of wealth but it not equivalent to it.
Banks create wealth by loaning their deposits over and over. Stocks create wealth by rising. Industries create wealth by adding value to raw materials. Services add wealth by creating value out of expertise and time.
None of these is likely to induce ruinous inflation into the system. Printing money can because it adds no extra value, but merely increases the lubricant for value to move through the economy. Too much money depreciates value by making goods artificially less valuable. Too little money, however, decreases wealth by making it harder to accumulate or work for you.
You want to government to print enough money to keep the economy running smoothly. In a way, that increases wealth just as topping up the oil in a car increases the value of the car by keeping it functioning at peak efficiency.
My question: How much, if it all, is the inflationary effect of printing money mediated by the (public) knowledge that such a thing has occurred? In other words, if the government did it secretly, and could keep it secret, would that have any mitigating effect on its inflationary consequences? Thanks.
My WAG is that public knowledge isn’t necessary. The fact that the bills are out there and someone is spending them means that those bills are being used to bid up the price of goods and services.
My question: How much, if it all, would the inflationary effect of printing money be mediated by the elimination of all other forms of taxes as well as the operating budget of the IRS?