Inflation is referred described as a “hidden tax” by some. It does not require legislation from Congress or the states, unlike other taxes. It isn’t deserving of a line on the 1040 federal income tax form, which many Americans will submit this week. It also doesn’t reflect as a % markup on the items we buy on the bottom of sales receipts.
Nonetheless, it drains resources from the economy and redirects them to less productive activities, much like a tax. It distorts pricing signals and causes capital misallocation. It’s a quiet way for the government and central bank to weaken the currency, hike prices, assist borrowers while punishing savers.
The official campaign for increased inflation as a remedy for the United States’ sluggish recovery began roughly two years ago with a study titled “Rethinking Macroeconomic Policy” by IMF researchers, including Chief Economist Olivier Blanchard.
Ken Rogoff of Harvard (does he think this time is different?) and Greg Mankiw, an economic adviser to President George W. Bush, are among many who have gotten on board. Higher inflation, they believe, would hasten the deleveraging process by allowing debtors, such as the US government, to repay their loans in depreciated dollars. (Borrowers get a 1, savers get a 0)
Another proponent of higher inflation, Princeton University’s Paul Krugman, claimed in a New York Times essay on April 5 that 3% or 4% inflation would “almost certainly assist the economy.” This would be accomplished by degrading the real worth of debt and dissuading firms and consumers from hoarding cash.
Think about what 6 to 8% inflation could accomplish if 3 to 4% inflation can do all that!
One of the drawbacks with aiming for a little more inflation is that you can wind up with a lot. Excess reserves, or inflation tinder, amount to $1.5 trillion on the Federal Reserve’s balance sheet. Banks will eventually find a more profitable method to exploit the 0.25 percent interest-paying deposits at the Fed: issuing loans, for example, which expands the money supply.
“It took three decades for people to believe the Fed was serious about committing to a long-term inflation aim of around 2%,” Jim Glassman, senior US economist at JPMorgan Chase & Co., says. “Never again would you listen to what the central bank said,” he adds if the Fed breaks its word. “A bigger risk premium would be demanded by investors.”
All of this, according to Glassman, sounds like something made up in the classroom, which it is. Raising inflation expectations lowers the real funds rate, which is already negative, and makes borrowing more appealing because the nominal funds rate cannot go below zero. So much for the much-needed debt reduction.
What about long-term interest rates, which appear to be the Fed’s main focus? The yield curve would steepen as nominal long rates adjusted to reflect increased inflation expectations, and the Fed, fearful of increasing mortgage rates, would initiate QE7, or whatever round of quantitative easing we’re on at the time.
Take a step back from the “how to” debate and contemplate the “why.” When the government prescribes the same policies that led us into this trouble as the remedy, something is profoundly wrong. The United States is living beyond its means. For the fourth year in a row, the federal government has a trillion-dollar deficit, compounding its failure to keep promises made to future retirees. Because home ownership was promoted as a reliable piggy bank, consumers went on a credit spree. All of the financial crisis postmortems underlined the need to save more and consume less.
Nonetheless, how come the road to abundance suddenly passes via Debtville and Inflation City? All of the incentives are pointing that way. Since December 2008, the Fed’s benchmark rate has remained between 0 and 0.25 percent. If Federal Reserve Chairman Ben Bernanke has his way that is, unless events force him to change his mind it will remain at zero until late 2014, a period of six years.
Would anyone in the financial markets have believed you 25 years ago if you told them the US economy would require near-zero interest rates for this long?
The Fed should not push us to spend, spend, spend if we need to conserve more, both personally and as a country. (Borrowers get a 2, savers get a 0) And some economists want to add more inflation to this poisonous mix?
Smart people, not conspiracy theorists, have begun to ask if Bernanke isn’t ready to err on the side of higher inflation to assist the US government pay off its $15.6 trillion debt. That is not a good way to build a reputation.
Bernanke is a history buff, and the Great Depression chapter currently has more dog-eared pages than the one on 1970s stagflation. That’s unfortunate because, according to Marvin Goodfriend, a professor of economics at Carnegie Mellon University in Pittsburgh and a former research director at the Richmond Fed, there’s enough historical “data Bernanke might utilize to start withdrawing before inflation gets ahead of him.”
Pre-emption does not appear to be part of Bernanke’s toolset. Maybe he has an extraordinary sense of timing, but if history is any indicator, the Fed will be late in normalizing interest rates. As a result, when we pay our taxes next year, we should expect to see part of that hidden inflation tax.
(Caroline Baum is a Bloomberg View writer and the author of “Just What I Said.”) Her views are entirely her own.)
Is inflation a tax that goes unnoticed?
Inflation can be regarded of as a hidden tax for unrestrained government action, as Nobel Laureate Milton Friedman proposed in a speech during the period of rising prices in the 1980s.
What role does inflation play as a tax?
When redistribution leads in goods and services being moved from the people to the government, inflation acts as a tax. It is borne primarily by those who are least able to pay. It acts as a tax on the people and transfers purchasing power to the government when the government issues more money to finance its budget deficit, repay its past debt, and fulfill increased demand for goods and services during inflation.
What does it mean to have a hidden tax?
The term “hidden tax” is defined as a tax that is 1: a tax that is paid by someone other than the person who is charged with it. 2: a form of economic injustice in which one’s real income or purchasing power is reduced.
Is there inflation that goes unnoticed?
A transcription service generated this transcript. This version may not be complete and will be updated.
Gabriel Rubin: I’m Gabriel Rubin. In certain circumstances, the price you’re paying for a product or service is the same as it was a few years ago, but you’re receiving a lot less for it.
J.R. Whalen: I’m J.R. Whalen, and I’m So, Gabe, why do businesses throw on these extra fees? Is it simply because they can, or is there anything else at work?
Gabriel Rubin: I’m Gabriel Rubin. Companies, like consumers, are currently confronting numerous economic challenges. Labor and supply chain concerns, as well as other pandemic-related interruptions, are causing them to incur substantially greater expenditures. As a result, they’re attempting to pass those expenses on to the customer, but they’re concerned that the customer may balk at the price rise and refuse to pay it.
J.R. Whalen: That’s right. I’ll get to how customers feel about this later, but how are corporations introducing these fees and charges without raising product prices? What does this mean for the typical shopper?
Gabriel Rubin: I’m Gabriel Rubin. Yeah. Many businesses are attempting to achieve this through various levies. They may even state out exactly what a consumer is paying for, such as a restaurant that charges a COVID fee because they have to wipe tables more frequently or comply with other government rules, in order to be as clear as possible. In other cases, they’re simply splitting things down and turning them into fees that were previously included in the service. For example, in Chicago, a restaurant organization called Lettuce Entertain You (lettuce written like the leafy green) charges a 3% processing fee that guests can request to be eliminated if they see it and ask the waiter to do so. And they claim it’s because they’ve had to cope with a lot of escalating costs as a result of COVID rules that are required to keep the restaurant running.
J.R. Whalen: I’m J.R. Whalen, and I’m Are these simply cost increases, or are firms providing something to consumers in exchange for these increased costs?
Gabriel Rubin: I’m Gabriel Rubin. In some circumstances, such as at vehicle dealerships, there are non-negotiable add-ons. So, while you may be receiving a service, you are not consciously deciding to do so. So, while you may be getting more bang for your buck, it’s money you didn’t mean to spend in the first place.
J.R. Whalen: That’s correct. As a result, no one like seeing unexpected charges on their bill. Is there anything more subtle than putting on fees that firms are doing?
Gabriel Rubin: I’m Gabriel Rubin. Yeah. In certain circumstances, the price you’re paying for a product or service is the same as it was a few years ago, but you’re receiving a lot less for it. So, at Disney World, for example, free shuttles from the airport to your Disney hotel are no longer included, and you must pay for an Uber, Lyft, or another shuttle service. Also, hotels, not necessarily Disney hotels, might not clean your room every day like they did before the outbreak. So, you can pay the same price for a hotel room, but you’re receiving poorer quality because they’re not cleaning it, or the breakfast that used to be hot eggs, toast, and bacon has been replaced with a small box of cereal or a granola bar in a paper bag. So, even if the amount you’re paying is nearly the same as it would have been before the pandemic, you’re getting a lot less for your money.
J.R. Whalen: I’m J.R. Whalen, and I’m When it comes to food, I’d want to concentrate on the grocery shop excursion for a bit. Food prices have ripped a greater hole in people’s finances than they did a year ago, so how are supermarkets and food manufacturers avoiding hiking the prices we see on the shelf?
Gabriel Rubin: I’m Gabriel Rubin. Yeah. Grocers and food manufacturers are reverting to an old method of inflation concealment known to economists as shrinkflation. Shrinkflation occurs when the price of a commonly recognized item at a grocery shop remains relatively constant. You might boost it a little, but you’re essentially maintaining the price while providing them a lot less. So, for example, we spoke with someone in Connecticut who was shopping for his family at their local grocery store. He also grabbed a block of cheese that he usually buys, which was around the same price. He stated that it was roughly ten cents higher than he remembered. Then he noted that it appeared to be much smaller, and he calculated that it had shrunk from 16 ounces to 12 ounces. So, even if the price is nearly the same as before, people who don’t look closely at the unit costs for products may be paying a lot more for what they’re getting.
J.R. Whalen: The unit price, of course. I use it all the time because it allows me to compare apples to apples. However, I assume that paying attention to unit costs requires customers to be a little more observant, right?
Gabriel Rubin: I’m Gabriel Rubin. Yes, it is correct. And I spoke with John Gourville, a pricing expert at Harvard Business School, who told me that in his and other research in this area, customers don’t actually look at unit prices. Since the 1970s, certain unit prices have been required by law. And the majority of the data indicates that people were interested in them in the 1970s, when they were a novel concept. However, unless you’re a budget-conscious shopper, you’re probably not checking the unit price of every item you buy at the supermarket.
J.R. Whalen: Gabe, we frequently hear from government leaders that they’re concerned about how prices have risen so quickly, but has anyone heard anything about these more secret practices?
Gabriel Rubin: I’m Gabriel Rubin. Yeah. Because of unit pricing and the ability to know how much something costs per ounce, for example, the government is pretty effective at tracking shrinkflation, but they’re not so good at recognizing quality decreases. A government analyst will have a difficult time calculating the value of having your hotel room cleaned every day. So, according to an economist I spoke with at the Bureau of Labor Statistics, which records those data, that’s something that’s very difficult to quantify, and it doesn’t really show up in government inflation figures. In terms of official monitoring, the Biden administration is working on a plan to look into some of these so-called garbage fees, or hidden fees, as they’re known. And the Consumer Financial Protection Bureau is looking into costs in the financial services industry, such as bank overdraft fees and other similar levies. The Department of Transportation is also looking into things like airline baggage taxes. And there’s a strong belief inside the Biden administration that these garbage fees stifle competition by preventing consumers from making informed decisions about how much goods cost if they can’t know what the final price will be. As a result, they see this as a competition, and I believe we can expect further moves in this area from the Biden administration in the future years.
J.R. Whalen: I’m J.R. Whalen, and I’m Now, I’m sure I know the answer to this, but how are consumers reacting to all of these fees and surcharges?
Gabriel Rubin: I’m Gabriel Rubin. Consumers are irritated by shrinking inflation, and they are concerned about inflation in general. When a dollar doesn’t go as far as it used to, consumers notice, and it shows up in consumer mood polls, which reveal that people are quite gloomy about the current health of the economy. Inflation expectations, on the other hand, ultimately drive future inflation. So, if you expect something to cost more in the future, you’ll probably be willing to pay more for it now because you don’t expect the price to fall. As a result, the risk in this sector is that customers will continue to demand greater prices, and businesses will continue to charge them, resulting in a continuing inflationary cycle.
J.R. Whalen: I’m J.R. Whalen, and I’m Is there any chance that these fees and levies will be eliminated anytime soon?
Gabriel Rubin: I’m Gabriel Rubin. It’s unlikely that those fees will go away anytime soon in our current climate, with so many unresolved COVID-related difficulties, such as in the supply chain and labor market. However, I believe that the fact that many of these companies chose to apply fees rather than straight-across price increases demonstrates that consumers are price-sensitive, and that these corporations do not want to impose new pricing that customers may not be ready to pay. It’s also a lot easier to get rid of a price than it is to get rid of something.
Do increased taxes result from inflation?
Because of rising inflation, the IRS has increased federal income tax brackets, basic deductions, 401(k) contribution limits, and other benefits for 2022. Other clauses, on the other hand, stay untouched, resulting in greater tax bills over time.
In October, the consumer price index increased by 6.2 percent over the previous year, the largest increase in almost three decades. While dozens of tax changes will reflect increasing expenses, fixed provisions may put filers at a disadvantage when their purchasing power dwindles.
What happens to taxes when prices rise?
Most Indiana local governments rely heavily on property taxes, and they were concerned about the impact of the COVID recession on property tax receipts.
However, growing property values in 2020 will result in higher assessed values in 2022, which will result in higher tax obligations. Indiana’s income grew in 2020 as a result of the federal COVID relief bills, hence the state’s property tax revenue ceiling will continue to rise in 2022. Because many jurisdictions’ tax rates are expected to decline next year, fewer people will be eligible for tax cap benefits. Local governments will be able to collect a larger portion of their tax revenues. It appears like the recession will not be an issue in 2022.
We’ve never had to deal with high inflation before. The property tax in Indiana today is very different from what it was during the 1970s, when inflation was extremely high. So let’s give it some thought.
Assume that there is “pure inflation,” which means that prices, incomes, and property values all rise at the same rate. It’s not going to happen, but it’s a fun experiment to see how inflation affects people.
Assume that property values rise in tandem with inflation. The assessed values are increasing. Because the maximum levy is calculated based on income growth, it rises with it. Tax rates remain unchanged if the levy and assessed value rise at the same rate. As assessed values rise, so do constitutional tax caps, resulting in higher tax obligations.
Inflation would be aggravating, yet nothing happens. Local governments will be able to cover their increased costs with the additional money. Property taxes remain unchanged as a percentage of inflated property values and earnings.
What could possibly go wrong? Any aspect of the tax system that isn’t adjusted for inflation. There are four that come to mind.
Assume that in 2021, inflation raises property values. This growth is being measured by assessors for assessed values in 2022. In 2023, those assessed values will be utilized to calculate tax bills. Until then, assessments will not be able to account for current inflation.
Second, the state caps property taxes at a maximum levy, which rises by a percentage called the maximum levy growth quotient every year. The Department of Local Government Finance determined a six-year average of Indiana non-farm income growth. The MLGQ for 2023 will be calculated by the DLGF in summer 2022, based on the most recent six income growth data, from 2016 to 2021.
That means the property tax levy will not begin to reflect inflation in 2021 until 2023. Even then, there will be one year of high inflation and five years of low inflation in the six-year average.
Inflation is increasing the cost of municipal government now, in 2021. Contracts may fix certain expenses, but many must be rising. Local governments will not have enough revenue to cover inflation for at least two years if assessments and maximum levies do not adapt.
We’re losing optimism that the inflation is only temporary, but let’s assume it fades away in 2022 and returns to the 2% level by 2023. Based on what transpired in 2021, assessments and the MLGQ will rise. Budgets for local governments would begin to catch up.
But what if inflation continues to rise? Assume it continues till 2028. At that point, the MLGQ’s six growth rates would all incorporate inflation. Maximum charges would eventually climb to compensate rising costs.
Except for the third problem. The MLGQ is limited to a maximum of 6%. If inflation is higher than thatas it is by the end of 2021the maximum levy will never be able to keep up with rising costs.
Let’s move on to number four. For most residences, the standard deduction is set at $45,000. Before the tax rate is applied, it is removed from the assessed value. This fixed deduction becomes less important in reducing assessed values if home prices rise rapidly. Home values would rise faster than taxable assessed values. Taxes on homeowners would grow at a greater rate than inflation.
This isn’t a monetary issue for local governments, but it could be a political issue. Homeowners are voters, and when their taxes rise, they tend to complain.
For a few years, high inflation would put a strain on local government budgets. Budgets would begin to catch up in 2023 if inflation is only temporary. Let’s hope inflation does not continue to rise.
Who is responsible for paying the inflation tax and why?
3) An inflation tax is used to fund government spending in Econoland. a) Describe who is responsible for paying the tax and how it is collected. Money holders pay the inflation tax because their money’s purchasing value decreases as a result of inflation caused by the government printing additional money.
Why are economists so opposed to inflation?
The importance of inflation for the standard of living, why people believe inflation affects their standard of living, other concerns besides the standard of living, psychological effects of inflation, fears that opportunists use inflation to exploit others, morale issues, and concerns about inflation are among the topics studied.
What are the three main reasons for paying taxes?
Why can’t the US government just get a job like the rest of us? Why does it need to reach into your wallet? You attend to school, have a very active social life, and still find time to work two weekend shifts at the bookstore.
Uncle Sam, it turns out, already has a job: allowing you to live in the country and collecting money in exchange.
Revenues
But your tax dollars aren’t simply flowing to the White House for extravagant parties (though they are utilized for that, too).
The government has a lot of bills to pay, and you’re getting help with some of them. Here are some of the expenses covered by the government:
- Talks with other countries and diplomatic missions, so that other countries don’t try to break down the doors all the time.
- We have trade agreements with other countries, so we may trade our goods for goods from other countries.
- Jails, cops, firefighters, and the shady underbelly that keeps everything in check
Robin Hood-ing it Up
Governments worry about a variety of things, and one of them is the possibility that a large number of their citizens could become enraged and attempt to overthrow them.
The government believes that one method to avert this is to keep people relatively satisfied.
Taxes should make you unhappy and make you more likely to overthrow the government, but they don’t. The government believes that by redistributing wealth (taking it from the wealthy and giving it to the needy), fewer people will become enraged.
The existence of a large middle class keeps the economy humming. The middle class is doing well enough to be able to buy what they require as well as part of what they desire. They’re more likely to be online shopping or watching lousy television than plotting a political takeover. (As a side point, poor voters outnumber rich voters, so the government can’t ignore them.)
For over a century, the system ran smoothly, and America reaped the benefits of a high level of living and a sizable middle class. You might have a decent standard of life if you were willing to work and had some basic financial knowledge.
The American ideal is starting to look a little less attractive these days. For several years, the middle class has shrunk, as the rich have become richer and the poor have gotten poorer.
Part of the issue is that other nations pay their people much less, allowing them to export productsranging from toothbrushes to computersfor a fraction of the price that they would cost to manufacture in the United States. Businesses embrace it because they can have whatever they’re manufacturing done in another country for a fraction of the cost. Customers appreciate it because they are not required to pay as much.
However, it raises some intriguing considerations about human rights. To compete at that level, are we willing to put people to work for a dollar a day? Are we willing to band together with countries that hold extremely divergent (to put it mildly) perspectives on human rights in order to earn a quick buck?
There are many suggestions about how to close the gap between the rich and the poor now that there is one. Is there a thought? Taxes should be raised. There are two opposing viewpoints on this.
- Some people consider it to be fantastic. Taxing the wealthy an additional 2% would provide more money to the rest of the country, allowing the less fortunate to live a decent life.
- Others remind the public that the top 1% of the country’s wealthiest citizens already pay 40% of all taxes collected, and that if taxes are raised, the wealthiest people will leave and other people will not want to grow wealthier.
Avoiding Something Worse Than Taxes
When you buy a new cell phone and throw away the old one, it jams landfills and emits pollutants. When you go to the movies in your automobile, you’re producing chemicals that contribute to global warming. You wind yourself dancing on a table with a lampshade on your head when you drink too much at a frat party.
The government is concerned about such issues (or pretends to be), so they tax specific items, such as fuel, alcohol, and technology, and use the proceeds to fund initiatives that help mitigate some of the damage.
The government may be powerless to stop you from posting humiliating selfies on Instagram, but it does invest in green technologies, environmental research, and conservation initiatives to safeguard the birds and animals harmed by your spending habits.
However, some argue that it is an inefficient system. Taxes, according to some, have negative implications. Taxes, for example, they argue, can make markets less efficient and harm the economy. If you pay a lot of taxes, you might want to buy less, which implies less demandand the economy suffers as a result. It could also indicate that you spend your money elsewhere to avoid paying sales tax. If your company is severely taxed, it may go out of business or become unable to compete with companies in other countries.
Your answer will be influenced by your political beliefs and prior tax experience. In any case, we recommend that you have a response.
Why are excise taxes frequently referred to as “hidden taxes”?
An excise tax, such as the gas tax, is one example. Excise taxes are placed on producers, unlike retail sales taxes, which are visible to customers. As a result, consumers are frequently unaware of the actual cost of excise taxes. These taxes reduce the consumption of the taxed item while increasing the consumption of other items. Excise taxes are a particularly expensive way for governments to raise money because they influence people’s spending decisions.