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Death and Taxes, Including Inflation: the Public versus Economists

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  • Jeffrey Rogers Hummel
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    Inflation worries the general public much more than it does the economics profession, and economists remain perplexed as to exactly why. The costs that concern economists are inflation’s deadweight loss. But that is only a part of the losses that concern the public, because inflation simultaneously transfers some of people’s income into the hands of government. The fact that the seigniorage tax may pay for programs they favor is a separate issue. Moreover, unlike income and other taxes, which people in democratic countries may think they have some control over through voting, seigniorage appears utterly arbitrary. In fact, people can be aware of the fall in their real cash balances without realizing at all that government gains. Admittedly the magnitude of this tax is low in developed countries like the United States, even when inflation hits double digits. But that hardly justifies indifference to dollars that inflation takes from the public and gives to the government. The public may still overestimate the costs of inflation after including their losses through the seigniorage transfer. Yet macroeconomists are guilty of overlooking the public’s dislike for this implicit tax.

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    Article provided by Econ Journal Watch in its journal Econ Journal Watch.

    Volume (Year): 4 (2007)
    Issue (Month): 1 (January)
    Pages: 46-59

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    Handle: RePEc:ejw:journl:v:4:y:2007:i:1:p:46-59
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    1. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-748, September.
    2. Mulligan, Casey B & Sala-I-Martin, Xavier X, 1997. "The Optimum Quantity of Money: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 687-715, November.
    3. Click, Reid W, 1998. "Seigniorage in a Cross-Section of Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(2), pages 154-171, May.
    4. Max Gillman, 1995. "Comparing Partial And General Equilibrium Estimates Of The Welfare Cost Of Inflation," Contemporary Economic Policy, Western Economic Association International, vol. 13(4), pages 60-71, October.
    5. Eisner, Robert & Pieper, Paul J, 1986. "A New View of the Federal Debt and Budget Deficits: Reply," American Economic Review, American Economic Association, vol. 76(5), pages 1156-1157, December.
    6. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters,in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc.
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