There’s been a lot of talk during the election about tax policy. I covered this before, but now I wanted to highlight another tax — one that is probably the most regressive tax we have. This tax is inflation. It is highly regressive for a couple of reasons. First, the higher your income the more able you are to adjust your spending habits to lessen the impact of inflation. Second, there is a general relationship between the cost of an item and its profit margin, and the larger the profit margin the less sensitive to inflation pressure the item is likely to be.
As most people are aware, inflation has been accelerating for the last several years (see the included graph). While the current economic crisis is very likely to stave off more inflation in the short term, most of the governments recent actions are highly inflationary. When the economy starts to recover, it is quite likely that we will experience a prolonged period of higher inflation than we have seem in over a decade.
One of the key points that I think should be understood is that when the government spends more than it collects, it invariably contributes to inflation. Keeping tax receipts lower than spending is just an illusion to make it seem like we are paying lower taxes when we are really just paying higher (regressive) stealth taxes to make up the difference.
The moral of the story is that there’s no such thing as a free lunch. All government spending is paid for by the people. Debt spending has the increased cost of the interest that the government pays (which is a whole other topic — the government has no need to pay interest as it could simply add money to the economy directly via spending).