Inflation Tax is the metaphorical representation of economic disadvantage which the bearers of cash or its equivalent undergo in a single currency denomination. In case of Inflation Tax, such disadvantages appear owing to the impact of inflation, which function as a hidden tax and subtract value from those assets.
Nature of Inflation Tax:
An Inflation Tax does not always involve debt elimination. Simply by eliminating cash or currency, the government of a country hastens liquidity, which may initiate pressures arising out of inflation. Under the influence of inflationary pressures, the taxes applicable on consumer income and expense extracts the additional cash from the country's inhabitants.
Effects exerted by Inflation Tax:
Sometimes, Inflation tax affects the economy of a country negatively, when it puts into distress, the middle-class population of a country, having low income. The government of a country raises the monetary amount available with its economy, by printing bills and paper notes. This, in turn, generates and increases revenues, initiating a change in the real money balance. All these activities brings about inflation in the economy of a country. The effects of raising the supply of money make the money-holders to pay the Inflation Tax, as the most evident cost of inflation.
One more impact exerted by Inflation tax is that the inflation-indexed bonds are also associated with the risk arising out of inflation This is because inflation compensation is subject to payment of tax.
Tax on the Inflation Tax:
A common effect of Inflation Tax is that it levies tax on both investment “income” and interest, against the nominal gains or the nominal interest rate. This meas that if a person purchases a bond with a interest rate of 6% and inflation rate worth 4%, he/she will receive the “Real” interest at the rate of 2%. Whatever be the case, this “Tax on the Inflation Tax” is equivalent to a tax on holdings (wealth tax). This tax is equivalent to the nominal tax rate .
[quote] The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems – the problems of life and of human relations, of creation and behaviour and religion. [/quote]
Nouriel Roubini, a.k.a. “Doctor Doom”, is chairman of Roubini Global Economics and professor of economics at New York University’s Stern School of Business. Roubini has been consistently cited as one of the world’s top global thinkers. This year, he was voted as the most influential economist in the world by Forbes magazine.
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Vice President and Director of the Global Economy and Development Program at the Brookings Institution. Former Turkish Minister of State for Economic Affairs. Head of the United Nations Development Program (UNDP) from 2005-2009.
James W. Harpel Professor of Capital Formation and Growth at the John F. Kennedy School of Government in Harvard University. Director of Program in International Finance and Macroeconomics at the National Bureau of Economic Research.