Inflation as an Iniquitous Tax

                     INFLATION AS AN INIQUITOUS TAX

 “Too much money in circulation causes the money to lose value”-this is the true meaning of inflation.  In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Inflation refers to a rise in prices that causes the purchasing power of a nation to fall.  Inflation means that your money won’t buy as much today as you could yesterday.  Inflation is the persistent and substantial rise in the general level of prices after full employment level of output. Inflation results in a fall in the value of money. Though output, employment and income often rise in such a scenario, it reduces the purchasing power of consumers and hence, is disliked by them.

In developing countries such as India, inflation is not a purely monetary phenomenon, but is often linked with fiscal imbalances and deficiencies in sound economic policies. The factors related to typical imbalances such as higher money growth and exchange rate depreciation arising from a balance of payments crisis dominate the inflation process in developing countries.

Inflation can be distinguished in various forms on the basis of rate of inflation such as creeping inflation, walking inflation, running inflation, hyperinflation and on the basis of degree of control such as open and suppressed inflation.  

Inflation has become a matter of great concern not only in developing countries like India but also in major developed countries as well. There are various causes which lead to inflation which have been well documented in the past. The two main factors wholesale price index (WPI) and consumer price index (CPI) particularly assume great significance in view of the marked change in the consumption pattern in recent years, both in urban and rural areas.  The consumer price index (CPI) can be largely taken as a true measure of inflation.

Tax can be defined as a compulsory contribution to state revenue, levied by the government on workers' income and business profits or added to the cost of some goods, services, and transactions. Tax can be defined as impost, contribution, duty or tribute paid to the government in the form of money other than transaction-specific goods and services.

Taxation is one of the primary power  that the governments  have. Taxation refers to compulsory or coercive money collection by a levying authority usually a government.

Tax and taxation are different from each other. Tax has a limited meaning. It is the amount of money levied/collected etc. by the government. Taxation is the process of tax collection. It covers the passing of the law by the parliament, making of rules by the government, entire set of people appointed as tax commissioners, assessment,  the appellate authorities & so on. Taxation is when taxes are collected from people and businesses. Tax is a set amount of money paid on each item or taken out of your pay check.

 Like every other strategic economic  tools, tax also has pros and cons of its own which may be defined in the following distinctions,

PUBLIC GOODS - Taxes are necessary for a government to run. Without taxes, a government would not be able to hire employees or pay for any social programs. Money from taxes pay for infrastructure such as roads, water systems, parks and public transportation. Social programs such as Social Security, Medicaid and Medicare would not be possible without taxes.

WASTEFUL SPENDING - Taxes are essential for basic government operations, but oftentimes tax dollars are channelled into areas that some may consider wasteful or unnecessary. Politicians have a vested interest in pandering to their constituents, which can lead to wasteful spending. 

ECONOMIC IMPACTS - Increased taxation tends to discourage economic activity and limit economic growth. The higher taxes are, the less money citizens will have to spend on goods and services and lower consumption leads to less revenue for business. When businesses make less money, they hire fewer workers and may fire workers to maintain profitability. Governments often pass tax cuts or give out tax refunds in periods of economic hardship to spark economic activity, though tax cuts can those who rely on public programs like Social Security and infrastructure spending.

SHAPING BEHAVIOUR - Taxation  has the power to shape or limit certain behaviours. When the government taxes a certain product or service, such as cigarettes, alcohol or tanning salons, it places a disincentive on purchasing the product or service. Taxation, therefore, can be used as a weapon against activities that are considered harmful, such as smoking and drinking.

RELATIONSHIP BETWEEN INFLATION AND TAX: Inflation can be treated as a kind of tax which is immoral, evil in nature (iniquitous ). 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.   

Hardworking workers are led to believe that they are rewarded whenever their employers increase their salaries and thus continuously work harder whenever they receive a “Pay-raise” through automated pay increases even though in fact no meaningful value has increased. Employers  use this opportunity without actually increasing the salaries of their employees in value – as if the pay-raise were to be an actual pay-raise, it has to be quite substantial to offset both inflation and  an overall increase in value. Conversely, lazy workers are also rewarded with pay increases. Rewarding staff for unproductivity only leads to more unproductivity.

An Inflation Tax does not always involve debt elimination. Under the influence of inflationary pressures, the taxes applicable on consumer income and expense extracts the additional cash from the country's inhabitants.

Inflation as a tax has many effects  on the economy mostly in a negative manner 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.  inflation-indexed bonds are also associated with the risk arising out of inflation This is because inflation compensation is subject to payment of tax.