Taxes: The Seen and the Unseen

If an inflation tax falls in the forest, and not one in a million understand it, does it make a sound?[1]

According to a recent news report by Reuters, “President Barack Obama called on Monday for new spending to boost growth and higher taxes on the rich, laying out an election-year vision for America in a budget that drew heavy fire from Republicans for failing to curb huge deficits” and that the “budget projects deficits remaining high this year and next before starting to decline, meaning more borrowing that will add well over $7 trillion to the national debt over the next decade.”

It seems to be that recent stress and social manifestations in Greece do not produce any worries within the U.S Government at extending deficits and government spending. A crucial difference between Greece and the United States is that in the case of Greece its government cannot make use of the European Central Bank to expand its money supply. The Fed, on the contrary, is more willing to buy securities from the U.S. Treasury. Greece faces a tougher constraint on the monetary side to solve its fiscal problems. Even if it’s the case that the U.S. is not in the same situation as Greece, it is not the same for a government to be able to use its own central bank, as it is to share one with other countries. In an election year, the expansion of government spending by selling U.S. Treasury bonds to the Fed can be interpreted as a political use such that the monetary policy follows the political cycle.

This is fundamentally wrong. Not just because increasing government debt and spending may not be the best course of action, but because it shouldn’t be the role of central banks to finance their governments. A central bank that consistently buys securities to finance the government fiscal deficits is using inflation as a taxation policy.  In the news it is reported that Obama wants to increase the taxes to the wealthy. The easy monetary policy of inflation, however, produces the other effect. When inflation starts to appear, it is usually the less wealthy, not the more wealthy, who are the ones that carry the higher burden of the inflationary tax.

Nicolas Cachanosky is a doctoral student in economics at Suffolk University, as well as a previous Sound Money Essay Contest winner.

[1] “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” –J.M. Keynes, The Economic Consequences of the Peace (1919)

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