Why we need an inflation tax
<p>If you Google “inflation tax”, you will see a list of resources explaining how inflation acts as a kind of tax.</p>
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<p>Example of results for the search term “inflation tax”.</p>
<p>What you won’t see are any mentions of ways to address inflation by taxing consumption. This is puzzling to me, because if inflation is caused by having too much money compete for not enough goods, couldn’t the government reign in the amount of excess money by taxing where excessive spending is taking place?</p>
<p>Instead, as a society, our preferred approach to quelling inflation is to increase interest rates. The basic premise of this strategy is that by making it more expensive for banks to borrow, the cost of borrowing for the entire economy increases, which reduces overall lending, investment, and ultimately consumption.</p>
<p>Fighting inflation by controlling interest rates works because of how much modern economies rely on debt to finance growth. With the total (private and public debt) debt of the United States totaling 7 times what it produces (GDP), increasing the amount that needs to be paid on that debt reduces the amount that can be spent on consumption.</p>
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