Inflation tax is a term which refers to the financial loss of value suffered by holders of cash and fixed-rate bonds, as well those on fixed income (not indexed to inflation), due to the effects of inflation; or capitol gains tax resulting from inflation. This financial loss of value is often expressed as a loss of purchasing power. It may be better characterized as a wealth transfer than a tax - since many people including debtors, holders of hard assets and some equities may simultaneously gain. Many economists hold that inflation affects the lower and middle classes more than the rich, as they hold a larger fraction of their income in cash, they are much less likely to receive the newly created monies before the market has adjusted with inflated prices, more often have fixed incomes, wages or pensions, and lack the means to avoid domestic inflation by reallocating assets overseas. Some argue that inflation is a regressive non-linear consumption tax.
Nevertheless, inflation improves the economic position of people with outstanding fixed interest debt like student loans and mortgages. It can improve the nation's balance of trade - stimulating exports with a less expensive currency - and decreasing imports. A large portion of the "tax" also falls on foreign holders of fixed income debt in the inflated currency. It is important to note that this "tax" on creditors is coupled with a simultaneous transfer to debtors - reducing their debt burden. By transferring wealth to people who are more likely to spend it, an inflation "tax" can further increase real (inflation adjusted) economic growth (beyond its beneficial impact on trade).
It may also hasten new purchases since inflation makes it costly to keep cash. Inflation can increase liquidity in depressed real estate markets since it would increase nominal asset values back above the loan values. This improved LTV allows for people to sell their homes, and move to pursue better economic opportunities and as such can improve efficiency of the labor markets. In this way, an "inflation tax" can improve real (inflation adjusted) economic growth and improve employment. Therefore a very tight monetary policy which seeks to reduce inflation - even at the cost of real (inflation adjusted) economic growth and jobs can be viewed as a "stagnation tax".
Read more about Inflation Tax: How It Occurs, "Tax On The Inflation Tax", Negative Interest Rates
Famous quotes containing the word tax:
“I have no doubt that it was a principle they fought for, as much as our ancestors, and not to avoid a three-penny tax on their tea; and the results of this battle will be as important and memorable to those whom it concerns as those of the battle of Bunker Hill, at least.”
—Henry David Thoreau (1817–1862)